mmmm 


'roblems 


VII  HERS 


WAR-TIME    FINANCIAL 
PROBLEMS 


WORKS   BY   HARTLEY   WITHERS. 


THE  BUSINESS  OF  FINANCE.  6s.  net 

Second  Impression. 

"He  treats  of  the  subject  mainly  in  its  relation  to  industry, 
and  smooths  the  path  for  those  who  find  the  way  rather  thorny. 
Timely  and  instructive." — Financial  Times. 
OUR  MONEY  AND  THE  STATE.  35.  6d.  net 

Second  Impression. 

"  It  should  be  read  at  once  by  every  taxpayer.     Mr.  Withers' 

latest  book  can  be  most  heartily  commended." — Morning  Post. 

STOCKS  AND  SHARES.  6s.  net. 

Fifth  Impression. 

"  It  is  a  good  book,  it  is  sure  of  its  public." — Morning  Post. 
THE  MEANING  OF  MONEY.  6s.  net. 

Eighteenth  Impression. 

"  Will  supersede  all  other  introductions  to  monetary  science ;  a 
safe  and  indispensable  guide  through  the  mazes  of  the  Money 
Market." — Financial  News. 

MONEY  CHANGING.  6s.  net 

Second  Impression. 

' '  Mr.  Withers  makes  the  topic  interesting  in  spite  of  its  obvious 
and  irrepressible  technicality.     Occasionally  he  renders  it  really 
amusing." — Financial  News. 
POVERTY  AND  WASTE.  6s.  net. 

Third  Impression. 

"Views  its  subject  from  the  advantageous  position  of  an  im- 
partial observer,  the  respective  cases  for  capital  and  labour,  rich 
and  poor,  being  brought  to  the  reader's  attention  in  a  convin- 
cingly logical  manner." — Financial  Times. 
WAR  AND  LOMBARD  STREET.  6s.  net 

Fourth  Impression. 

"  Nothing  could  be  clearer  or  more  enlightening  for  the  general 
reader." — The  Times. 
INTERNATIONAL  FINANCE.  6s.  net. 

Third  Impression. 

"We  heartily  commend  a  timely  work  dealt  with  in  popular 
and  simple  style,  a  standard  financial  work." — Morning  Post. 

LOMBARD  STREET.  6s.  net. 

Third  Impression. 

A  Description  of  the  Money  Market,  by  WALTER  BAGEHOT. 
Edited  with  a  new  Preface  by  HARTLEY  WITHERS.  "There 
is  no  city  man,  however  ripe  his  experience,  who  could  not  add 
to  his  knowledge  from  its  pages." — Financial  News. 

LONDON:    JOHN    MURRAY. 


WAR-TIME  FINANCIAL 
PROBLEMS 


BY 

HARTLEY   WITHERS 
\\ 


"  Blest  paper  credit !  last  and  best  supply  ! 
That  lends  Corruption  lighter  wings  to  fly  ! 
Gold  imp'd  by  thee,  can  compass  hardest  things, 
Can  pocket  States,  can  fetch  or  carry  Kings  ; 
A  single  leaf  shall  waft  an  Army  o'er, 
Or  ship  off  Senates  to  a  distant  Shore  ; 
A  leaf,  like  Sibyl's,  scatter  to  and  fro 
Our  fates  and  fortunes,  as  the  winds  shall  blow  ; 
Pregnant  with  thousands  flits  the  Scrap  unseen, 
And  silent  sells  a  King,  or  buys  a  Queen." 

POPE,  Moral  Essays. 


NEW  YORK 
E.  P.  BUTTON  AND  COMPANY 


-: 


PREFACE 

AT  a  time  when  Finance  is  of  greater  importance  than 
ever  before,  it  is  hoped  that  this  small  volume  may  be 
of  interest  and  value  to  the  public,  and  help  the 
application  of  war's  lessons  to  the  problems  that  face 
us  in  peace. 

The  contents,  with  the  exception  of  the  last  article 
on  "  Money  or  Goods  ?  "  (which  appeared  in  the  Trade 
Supplement  of  the  Times  for  December,  1918),  have 
already  been  published  in  Sperling's  Journal,  from 
September,  1917,  to  March,  1919;  they  have  been 
left  as  they  were  written,  except  for  a  few  verbal 
corrections. 

I  desire  to  express  my  thanks  to  the  Editors  of 
Sperling's  'Journal  and  of  the  Times  for  their  kind 
permission  to  reprint  the  articles. 

H.  WITHERS. 

June,  1919. 


V 


CONTENTS 

i 

THE  OUTLOOK  FOR  CAPITAL  PAGE 

The  Creation  of  Capital— The  Inducement— War  and  Capital     .         I 

II 

LONDON'S  FINANCIAL  POSITION 

London  after  the  War — A  German  View — The  Rocks  Ahead — 
Our  Relative  Position  secure — Faulty  Finance — The  Strength 
we  have  shown— The  Nature  and  Limits  of  American  Com- 
petition— No  other  likely  Rivals 15 

III 

WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN— I 
Financial  Conditions  in  August,  1914 — No  Scheme  prepared  to 
meet  the  Possibility  of  War— A  Short  Struggle  expected— The 
Importance  of  Finance  as  a  Weapon — Labour's  Example — 
The  Economic  Problem  of  War — The  Advantages  of  Direct 
Taxation — The  Government  follows  the  Path  of  Least  Resist- 
ance— The  Effect  of  Currency  Inflation  ,  .  .  31 

IV 

WAR   FINANCE  AS   IT  MIGHT    HAVE  BEEN — II 
The  Changed  Spirit  of  the  Country — A  Great  Opportunity  thrown 
away — What  Taxation  might  have  done — The  Perils  of  Infla- 
tion— Drifting  stupidly  along  the  Line  of  Least  Resistance — 
It  is  we  who  pay,  not  "  Posterity  " 48 

V 

A   LEVY  ON   CAPITAL 

The  Objects  of  the  Levy — Its  Origin  and  History— How  it  would 
work  in  Practice— The  Attitude  of  the  Chancellor — The 
Effects  of  the  Scheme  in  discouraging  Thrift — Its  Fallacies  and 
Injustices— The  Insuperable  Obstacles  to  its  Application — 
Its  Influence  on  Production — One  of  the  Tests  of  a  Tax — 
Judged  by  this  Test  the  Proposed  Levy  is  doomed  .  .  63 

VI 

OUR   BANKING  MACHINERY 

The  Recent  Amalgamations— Will  the  Provinces  suffer  ? — Con- 
solidation not  a  New  Movement — The  Figures  of  the  Past 
Three  Decades — Reduction  of  Competion  not  yet  a  Danger — 
The  Alleged  Neglect  of  Local  Interests — Shall  we  ultimately 
have  One  Huge  Banking  Monopoly  ? — The  Suggested  Repeal 
of  the  Bank  Act — Sir  E,  Holden's  Proposal  ...  76 


viii  CONTENTS 

VII 

THE  COMPANIES  ACTS  PAGE 

Another  Government  Committee— The  Fallacy  of  imitating  Ger- 
many— Prussianising  British  Commerce — The  Inquiry  into 
the  Companies  Acts — Will  Labour  Influence  dominate  the 
Report  ?— Increased  Production  the  Great  Need— Will  it  be 
met  by  tightening  up  the  Companies  Acts  ?— The  Dangers  of 
too  much  Strictness — Some  Reforms  necessary — Publicity, 
Education,  Higher  Ideals  the  only  Lasting  Solution — The 
Importance  of  Foreign  Investments — Industry  cannot  take 
all  Risks  and  no  Profits 91 

VIII 

THE  YEAR'S  BALANCE-SHEET 

The  Figures  of  the  National  Budget — A  Large  Increase  in 
Revenue  and  a  Larger  in  Expenditure — Comparison  with  Last 
Year  and  with  the  Estimates — The  Proportion  borne  by 
Taxation  still  too  Low — The  Folly  of  our  Policy  of  Incessant 
Borrowing — Its  Injustice  to  the  Fighting  Men  .  .  .  106 

IX 

COMPARATIVE  WAR  FINANCE 

The  New  Budget — Our  own  and  Germany's  Balance-sheets — The 
Enemy's  Difficulties — Mr  Bonar  Law's  Optimism— Special 
Advantages  which  Peace  will  bring  to  Germany — A  Com- 
parison with  American  Finance — How  much  have  we  raised 
from  Revenue  ? — The  Value  of  the  Pound  To-day — The  1918 
Budget  an  Improvement  on  its  Predecessors — But  Direct 
Taxation  still  too  Low — Deductions  from  the  Chancellor's 
Estimates 118 

X 

INTERNATIONAL  CURRENCY 

An  Inopportune  Proposal— What  is  Currency  ? — The  Primitive 
System  of  Barter — The  Advantages  possessed  by  the  Precious 
Metals— ?Gpld  as  a  Standard  of  Value — Its  Failure  to  remain 
Contant — uurrency  and  Prices — me  Complication  of  other 
Instruments  of  Credit — No  Substitute  for  Gold  in  Sight — Its 
Acceptability  not  shaken  by  the  War — A  Fluctuating  Stan- 
dard not  wholly  Disadvantageous — An  International  Currency 
fatal  to  the  Task  of  Reconstruction — Stability  and  Certainty 
the  Great  Needs  , 134 

XI 

BONUS  SHARES 

A  Deluge  of  Bonus  Shares— The  Effect  on  the  Market— A  Problem 
in  Financial  Psychology — The  Capitalisation  of  Reserves — 
The  Stock  Exchange  View — The  Issue  of  Bonus-carrying 
Shares— The  Case  of  the  A.B.C.— A  Wiser  Variation  from 


CONTENTS 


Canada— Bonus  Shares  on  Flotation— An  American  Device 
—Midwife  or  Doctor  ?— The  Good  and  Bad  Points  of  both 
Systems *49 

XII 

STATE   MONOPOLY   IN   BANKING 

Bank  Fusions  and  the  State — Their  Effects  on  the  Bank  of  England 
—Mr  Sidney  Webb's  Forecast— His  Views  of  the  Benefits  of 
a  Bank  Monopoly— The  Contrast  between  German  Experts 
and  British  Amateurs— Bankers'  Charges  as  affected  by 
Fusions— The  Effects  of  Monopoly  without  the  Fact— The 
"Disinterested  Management"  Fallacy— The  Proposal  to 
split  Banking  Functions — A  Picture  of  the  State  in  Control  163 

XIII 
FOREIGN   CAPITAL 

The  Difference  between  Aims  and  Acts — Should  Foreign  Capital 
be  allowed  in  British  Industry  ? — The  Supremacy  of  London 
and  National  Trade — No  need  to  fear  German  Capital — We 
shall  need  all  we  can  get  — Foreign  Shares  in  British  Com- 
panies—Can and  should  the  Disclosure  of  Foreign  Ownership 
be  forced  ? — The  Difficulties  of  the  Problem — Aliens  and 
British  Shipping— The  Position  of  "  Key  "  Industries— Free- 
dom to  Import  and  Export  Capital  our  Best  Policy  .  .180 

XIV 

NATIONAL  GUILDS 

The  Present  Economic  Structure — Its  Weaknesses  and  Injustices 
— Were  things  ever  better  ? — The  Aim  of  State  Socialism — 
A  Rival  Theory — The  New  Movement  of  Guild  Socialism — 
Its  Doctrines  and  Assumptions — Payment  "  as  Human 
Beings  " — The  "Degradation  "  of  earning  Wages — Produc- 
tion irrespective  of  Demand — Is  that  the  Real  Meaning  of 
Freedom? — The  Old  Evils  under  a  New  Name — A  Con- 
ceivably Practical  Scheme  for  some  other  World  .  .  198 

XV 
POST-WAR  FINANCE 

Taxation  after  the  War — Mr.  Hoare's  Scheme  described  and 
analysed — The  Position  of  the  Rentier — Estimates  of  the 
Post- War  Debt — The  Compulsory  Loan  Proposal — What 
Advantages  has  it  over  a  Levy  on  Capital  ? — The  Argument 
from  Social  Justice — Questions  still  to  be  answered— The 
Choice  between  a  Levy  and  Stiff  Taxation — Are  we  still  a 
Creditor  Nation  ? — Our  Debt  not  a  Hopeless  Problem — Sug- 
gestions for  solving  it  212 


x  CONTENTS 

XVI 

THE  CURRENCY  REPORT  PACK 

Currency  Policy  during  the  War — Its  Disastrous  Medievalism — 
The  Report  of  the  Cunliffe  Committee — A  Blast  of  Common 
Sense — The  Condemnation  of  our  War  Finance — Inflation 
and  the  Rise  in  Prices — The  Figures  of  the  Present  Position 
— The  Break  in  the  Old  Relation  between  Legal  Tender  and 
Gold— How  to  restore  it — Stop  Borrowing  and  reduce  the 
Floating  Debt — Return  to  the  Old  System — The  Committee's 
Sane  Conservatism — A  Sound  Currency  vital  to  National 
Recovery  .........  227 

XVII 

MEETING  THE  WAR  BILL 

The  Total  War  Debt— What  are  our  Loans  to  the  Allies 
worth  ? — Other  Uncertain  Items — The  Prospects  of  making 
Germany  pay — The  Right  Way  to  regard  the  Debt — Our 
Capital  largely  intact — A  Reform  of  the  Income  Tax — The 
Debt  to  America — The  Levy  on  Capital  and  other  Schemes — 
The  only  Real  Aids  to  Recovery  .  .  .  .  .243 

XVIII 

THE  REGULATION  OF  THE  CURRENCY 
Mj^aj^^mD^grecjated  Currency — Its  Evils  To-day — The  Plight 
of  the  Rentier— Mr  Goodenough's  Suggestion — Sir  Edward 
Holden's  Criticisms  of  the  Currency  Committee — His  Scheme 
of  Reform — Two  Departments  or  One  in  the  Bank  of  Eng- 
land ?— Not  a  Vital  Question— The  Ratio  of  Notes  to  Gold — 
Objections  to  a  Hard-and-fast  Ratio — The  Limit  on  Note 
Issues — The  Federal  Reserve  Act  and  American  Optimism — 
Currency  and  Commercial  Paper — A  £efltraj/;old  Reserve 
witjLCentral  Control  ,  , 261 

XIX 

TIGHTENING  THE  FETTERS  OF  FINANCE 
The  New  Meaning  of  Licence — The  Question  of  Capital  Issues — 
Text  of  the  Treasury  Regulations — Their  Scope  and  Effect — 
The  Position  of  the  Stock  Exchange — Wider  Issues  at  Stake — 
Should  Capital  be  set  Free  ?— The  Arguments  for  and  against 
— Perils  of  an  Excessive  Caution — The  New  Committee  and 
its  Terms  of  Reference — The  Absurdity  of  prohibiting  Share- 
splitting — The  Storm  in  the  House  of  Commons — Dis- 
appearance of  the  Retrospective  Clause — A  Sample  of 
Bureaucratic  Stupidity 277 

XX 

MONEY  OR  GOODS? 

"  Boundless  Wealth  " — Money  and  the  Volume  of  Trade — The 
Quantity  Theory— Th^G^old  Sjgndajii — How  is  the  Volume 
of  Paper  to  be  regulatedT^Mr  Kitson's  Ideal  .  .  .  293 

INDEX 305 


WAR-TIME   FINANCIAL 
PROBLEMS 


THE   OUTLOOK    FOR  CAPITAL 

September,  1917 

The  Creation  of  Capital — The  Inducement— War  and  Capital. 

ONE  of  the  questions  that  are  now  most  keenly 
agitating  the  minds  of  the  investing  public  and  of 
financiers  who  cater  for  its  wants,  and  also  of 
employers  and  organisers  of  industry  who  are  trying 
to  see  their  way  into  after-the-war  conditions,  is  that 
of  the  supply  of  capital.  On  this  subject  there  are 
two  contradictory  theories :  one  considers  that 
owing  to  the  destruction  of  capital  during  the  war, 
capital  will  be  for  many  years  at  a  famine  price  ;  the 
other,  that  owing  to  the  exhaustion  of  all  the  warring 
powers,  that  is,  of  the  greater  part  of  the  civilised 
world,  the  spirit  of  enterprise  will  be  almost  dead, 
the  demand  for  capital  will  be  extremely  limited, 
and  consequently  the  supply  of  it  on  offer  will  go 
begging  to  find  a  user.  It  seems  likely  that,  as 
usual,  the  truth  lies  somewhere  between  these  two 
extreme  views  •  but  we  shall  best  answer  the  question 


2        THE  OUTLOOK  FOR  CAPITAL 

if  we  first  get  a  clear  idea  of  what  we  mean  by 
capital. 

On  the  subject  of  the  definition  of  capital,  econo- 
mists differ  with  all  the  consistency  that  they  only 
show  in  differing.  One  of  the  earliest  descriptions 
of  capital  was  given  by  Turgot,  who  thought  that 
capital  meant  "  valeurs  accumulees."  In  this  wide 
sense  the  word  covers  all  goods  which  have  value, 
that  is,  can  be  exchanged  into  other  goods.  From 
this  point  of  view,  the  schoolboy  who  invests  six- 
pence in  marbles  is  a  capitalist,  because  he  has  bought 
an  asset  which  is  not  immediately  consumed,  but 
can,  later  on,  if  his  fancy  urges  him,  be  exchanged 
into  white  mice  or  any  other  object  of  his  desire. 
On  the  other  hand,  the  schoolfellow  who  at  the  same 
time  spends  sixpence  on  cherries  and  eats  them  has 
put  his  money  into  immediate  consumption,  his  asset 
is  digested,  and  he  has  no  capital  in  any  sense  of 
the  word. 

Later,  the  definition  was  narrowed  by  John  Stuart 
Mill,  for  instance,  into  the  sense  of  wealth  set  aside 
to  increase  production.  From  this  point  of  view 
capital  practically  means  the  equipment  and  tools  of 
industry  in  the  widest  sense  of  the  word,  including 
agriculture  and  transport.  Lately  economists  have 
shown  a  tendency  to  go  back  to  the  wider  application 
of  the  word,  and  an  American  economist,  Dr  Ander- 
son, who  has  just  published  a  book  on  the  Value  of 
Money,  goes  so  far  therein  as  to  state  that  a  "  dollar 
is  capital.'*  The  language  of  the  City  generally  uses 
the  word  in  the  narrow  sense  adopted  by  Mill,  and 
there  is  very  much  to  be  said  for  this  view  of  the 


WAR'S  DESTRUCTION  3 

real  meaning  of  capital.  Marbles  to  play  with, 
houses  to  live  in,  motor-cars  to  go  joy-riding  in — all 
these  are  assets  which  can  be  disposed  of,  and  so,  in 
a  sense,  may  be  called  capital.  But  the  business- 
like meaning  of  the  word  is  the  tools  and  equipment 
of  industry,  because  it  is  only  by  their  possession 
that  the  wealth  of  mankind  not  only  increases  man's 
present  enjoyment,  but  enhances  his  future  output 
of  the  goods  necessary  for  his  existence. 

If  we  take  the  word  in  this  sense  it  becomes  at 
once  apparent  that  the  theory  is  exaggerated  which 
maintains  that  war  is  destroying  capital,  so  that 
capital  will  long  be  at  a  famine  price.  The  extent  to 
which  war  is  actually  destroying  the  tools  and  equip- 
ment of  industry  is  quite  limited.  On  the  actual 
battlefield  that  sort  of  destruction  proceeds  apace 
when  factories  are  shelled  into  shapeless  lumps  of 
bricks,  and  when  the  surface  of  the  earth,  that  man's 
skill  had  developed  into  great  productive  fertility, 
is  torn  into  craters  and  covered  with  rubbish.  There 
is  also  rapid  destruction  of  a  very  important  part  of 
the  equipment  of  industry  owing  to  the  submarine 
campaign,  which  is  sinking  so  many  fine  ships  that 
were  meant  to  carry  goods  from  one  country  to 
another.  But,  apart  from  this  actual  destruction 
on  the  battlefield  and  on  the  sea,  the  tools  and  equip- 
ment of  industry  over  the  greater  part  of  the  eaith 
remain  untouched.  It  is  true  that,  owing  to  the 
preoccupations  of  the  war,  not  so  much  work  as 
usual  is  being  put  into  the  upkeep  and  repair  of  our 
railways,  factories  and  other  industrial  tools.  But 
at  the  same  time  an  enormous  amount  of  new 


4          THE  OUTLOOK  FOR  CAPITAL 

machinery  is  being  created  for  the  manufacture  of 
munitions  and  other  stuff  needed  for  the  war,  and  a 
large  part  of  this  new  machinery  ought  to  be  avail- 
able as  industrial  capital  when  the  war  is  over. 
Those  people  who  talk  so  glibly  of  the  enormous 
destruction  of  capital  by  the  war  are  surely  making 
a  mistake  common  to  minds  which  look  at  economic 
questions  through  a  financial  telescope,  mistaking 
money  for  capital.  They  see  that  an  enormous 
amount  of  money  is  being  spent  on  the  war,  and  they 
jump  to  the  conclusion  that  this  money,  if  not  spent 
upon  the  war,  would  have  been  put  into  capital 
investments  and  so  have  increased  the  tools  and 
equipment  of  industry.  In  fact,  a  great  deal  of  the 
money  now  spent  upon  the  war  would  have  been 
spent,  if  there  had  been  no  war,  not  upon  increasing 
the  equipment  of  production,  but  upon  purely 
frivolous  and  extravagant  consumption.  There  is 
no  need  to  dwell  on  the  effect  of  war  in  reducing 
many  kinds  of  expenditure  on  which  hundreds  of 
millions  must  have  gone  in  peace  time,  and  this 
restriction  of  extravagant  consumption  has  to  be 
deducted  before  we  even  admit,  not  that  all  money 
spent  upon  the  war  is  destroyed  capital,  but  even 
that  all  the  money  spent  upon  the  war  is  destroying 
what  might  otherwise  have  become  capital. 

If,  then,  it  is  true  that  the  war  is  not  making  a 
very,  terribly  substantial  inroad  upon  the  mass  of 
existing  capital,  how  is  it  going  to  affect  the  supply 
of  capital  in  the  future  ?  To  answer  this  ques- 
tion we  have  to  see  how  capital  is  created.  The 
answer  to  this  question  is  very  simple,  very  obvious, 


CREATED   BY    SAVING  5 

and  very  dull.  Capital  can  only  be  created  by 
saving. 

Saving  is  such  an  entirely  unpopular  virtue  that 
it  seems  at  first  sight  a  disastrous  conclusion  to  arrive 
at,  that  if  we  want  to  increase  the  supply  of  capital 
it  can  only  be  done  by  stimulating  this  unattractive 
habit ;  and  there  is  a  further  question  to  be  asked — 
whether  it  will  be  necessary  or  desirable  to  have  a 
great  increase  in  the  supply  of  capital.  As  was 
pointed  out  above,  one  theory  of  after-war  needs 
maintains  that  the  world  will  be  so  exhausted  by 
this  great  struggle  that  it  will  have  no  enterprise  and 
no  energy  left,  and  that  capital  will  go  begging.  If 
this  be  so,  we  need  not  trouble  to  inquire  as  to 
whether  the  supply  of  capital  can  be  made  plentiful. 
But  I  venture  to  think  that  this  view  is  very  probably 
wrong,  though  it  is  very  dangerous  to  prophesy  con- 
cerning the  purely  psychological  question  of  the 
state  of  mind  in  which  the  citizens  of  the  warring 
Powers  will  end  the  war.  It  is,  however,  at  least 
probable  that  the  prices  which  are  then  likely  to  rule 
will  stimulate  enterprise  all  over  the  world ;  that 
every  one  will  see  that  there  is  a  great  work  to  be 
done  in  getting  industry  back  on  to  a  peace  basis, 
and  a  great  profit  to  be  made  by  those  who  do  this 
work  most  successfully,  and  that  the  demand  for 
capital  is  likely,  for  some  years  at  least,  to  clamour 
for  all  that  can  be  produced. 

To  go  back,  then,  to  the  statement  that  only  by 
saving  can  capital  be  created.  The  man  who  saves, 
instead  of  spending  money  on  his  own  enjoyment, 
hands  it  over  to  some  company  or  Government  to  be 

B 


6  THE  OUTLOOK  FOR  CAPITAL 

spent  on  some  industrial  or  national  purpose.  When 
it  is  put  into  industry  it  builds  a  factory  or  a  ship  or  a 
railway  or  a  canal,  or  clears  a  wilderness  for  cultiva- 
tion, or  does  one  of  the  innumerable  other  things 
which  are  necessary  for  the  production  and  transport 
of  the  goods  which  mankind  enjoys.  And  it  is  only 
by  this  process  of  handing  over  buying  power,  instead 
of  using  it  for  our  own  amusement  and  enjoyment, 
to  others  who  will  use  it  for  furthering  production 
that  the  tools  and  equipment  of  industry  can  be 
multiplied. 

Something  can  be  done  by  banks  and  financiers 
in  supplying  credit  in  the  form  of  advances  and 
acceptances  ;  but  this  method  is  only  like  oiling  the 
wheel  of  industry,  the  real  driving  power  of  which 
has  to  be  saved  capital.  Creating  credits  simply 
means  that  a  certain  amount  of  buying  power  is 
manufactured  and  handed  over  to  those  to  whom  the 
credit  is  given.  It  does  not  set  free  any  labour  or 
goods  to  be  put  into  industry.  That  is  only  done 
by  the  man  who  abstains  from  consumption  and 
saves  money  by  restraining  his  desire  to  spend  it  on 
himself,  and  puts  it  at  the  disposal  of  industry.  The 
man  who  saves  money,  who  has  always  hitherto  been 
rather  despised  by  his  companions  and  resented  by  a 
certain  class  of  social  reformer  and  many  other  un- 
educated people  as  a  capitalist  bloodsucker,  is  thus, 
in  fact,  the  person  who  leaves  the  world  richer  than 
he  found  it,  having  put  his  money,  the  product  of 
his  own  work,  into  increasing  the  world's  output, 
instead  of  spending  it  on  such  forms  of  enjoyment  as 
heavy  lunches  and  cinema  shows. 


THE   RATE   OF   INTEREST  7 

The  man  who  does  this  beneficent  work,  increasing 
mankind's  output  of  goods,  and  providing  employ- 
ment as  long  as  the  factory  or  railway  that  he  helps 
to  build  is  running,  is  induced  to  do  so,  as  a  rule, 
by  the  purely  selfish  motive  of  providing  for  his  old 
age  or  for  those  who  come  after  him  by  earning  the 
rate  of  interest  that  is  paid  to  him  for  his  capital. 
What  is  this  rate  of  interest  going  to  be,  and  how 
much  eff ect  does  it  have  upon  the  creation  of 
capital  ? 

Some  people  argue  that  a  low  rate  of  interest 
makes  people  save  more  because  it  is  necessary  for 
them  to  save  more  in  order  to  acquire  independence. 
Others  maintain  that  a  high  rate  of  interest  induces 
people  to  save  because  they  can  see  the  direct 
advantage  of  doing  so.  Both  these  arguments  are 
probably  true  in  some  cases.  But,  as  a  rule,  people 
who  have  the  instinct  of  saving  will  save,  within 
certain  limits,  whatever  the  rate  of  interest  may  be. 
When  the  rate  of  interest  is  low  they  will  certainly 
not  reduce  their  saving  because  each  hundred  pounds 
that  they  put  away  brings  them  in  comparatively 
little,  and  when  the  rate  of  interest  is  high  the  attrac- 
tion of  the  high  rate  will  also  deter  them  from  dimin- 
ishing the  amount  that  they  put  aside.  Moreover, 
we  have  to  consider,  not  only  the  money  payment 
involved  by  the  rate  of  interest,  but  its  buying  power 
in  goods.  In  1896  trustee  securities  could  only  be 
bought  to  return  a  yield  of  2|  per  cent,  for  the  buyer  ; 
now  the  investor  can  get  5j  per  cent,  and  more  from 
the  British  Government.  And  yet  the  power  that 
this  5j  gives  him  over  the  goods  and  services  that  he 


8  THE  OUTLOOK  FOR  CAPITAL 

wants  for  his  comfort  is  probably  not  greater,  and 
very  likely  rather  less,  than  the  power  which  he  got 
in  1896  from  his  2\  per  cent.     One  of  the  few  facts 
which  seem  to  stand  out  clearly  from  a  study  of  the 
movement  of  the  prices  of  securities,  and  conse- 
quently of  the  rate  of  interest  to  be  derived  from 
them,  is  that  the  rate  of  interest  is  high  when  the 
price  of  commodities  is  high,  and  vice  versa.     So  that 
the  answer  to  the  question :    What  is  the  rate  of 
interest  likely  to  be  after  the  war  ?  may  be  given,  in 
Quaker  fashion,  by  another  question  :    What  will 
happen  to  the  index  number  of  the  prices  of  commo- 
dities ?     It  seems  fairly  probable  that  both  these 
questions  may  be  answered,  very  tentatively  and 
diffidently,  by  the  expression  of  a  hope  that  after  a 
time,  when  peace  conditions  have  settled  down  and 
all  the  merchant   ships  of  the  world  have  been 
restored  to  their  peaceful  occupations,  the  general 
level  of  the  price  of  commodities  will  be  materially 
lower  than  it  is  now,  though  probably  considerably 
higher  than  it  was  before  the  war.     If  this  be  so,  then 
it  is  fairly  safe  to  expect  that  the  rate  of  interest,  as 
expressed  in  money,  will  follow  the  movement  of 
prices  of  goods.    But  it  must  be  remembered  that 
by  rate  of  interest  I  mean  the  pure  rate  of  interest, 
that  is  to  say,  the  rate  earned  on  perpetual  fixed- 
charge  securities  of  the  highest  class.     It  may  be 
that,  owing  to  the  very  large  amount  of  gilt-edged 
securities  created  in  the  course  of  the  war  by  the 
various  warring  Governments,  the  rate  of  profit  to 
be  earned  by  the  man  who  takes  the  risks  of  industry 
from  dividends  on  ordinary  shares  and  stocks  will 


AFTER-WAR   SAVING  9 

have  to  be  made  relatively  more  attractive  than  it 
was  before  the  war. 

If,  then,  capital  can  only  be  created  by  saving, 
how  far  will  the  war  have  helped  towards  its  more 
plentiful  production  ? 

Here,  again,  we  are  faced  with  a  psychological 
question  which  can  only  be  answered  by  those  who 
are  bold  enough  to  forecast  the  state  of  mind  in  which 
the  majority  of  people  will  find  themselves  when  the 
war  is  over.  If  there  is  a  great  reaction,  and  every- 
body's one  desire  is  to  throw  this  nightmare  of  war 
off  their  chests  and  go  back  to  the  times  as  they  were 
before  it  happened,  then  all  that  the  war  has  taught 
us  about  the  production  of  capital  will  have  been 
wasted.  But  I  rather  doubt  whether  this  will  be  so. 
Saving  merely  means  the  diversion  of  a  certain  pro- 
portion of  the  output  of  industry  into  the  further 
equipment  of  industry.  The  war  has  taught  us 
lessons  which,  if  we  use  them  aright,  will  help  us  to 
increase  enormously  the  output  of  industry.  So  that 
if  these  lessons  are  used  aright,  and  industry  does 
not  waste  its  time  in  squabbles  over  the  sharing  of 
its  product,  its  output  may  be  so  great  that  a  com- 
paratively smaller  amount  of  saving  in  relation  to 
the  total  output  may  produce  a  larger  amount  of 
capital  than  was  made  available  in  days  before  the 
war.  There  is  a  further  point,  that  the  war  has 
taught  a  great  many  people  who  never  saved  at  all 
to  save  a  good  deal.  It  was  estimated  before  the 
war  that  we  in  this  country  were  saving  about  four 
hundred  millions  a  year.  This  figure  was  necessarily 
a  guess,  and  must  be  taken  for  what  it  is  worth, 


io         THE  OUTLOOK  FOR  CAPITAL 

There  can  be  no  doubt  that  the  amount  of  real  saving 
now  in  progress,  voluntary,  owing  to  the  patriotic 
effort  of  people  who  think  they  ought  to  restrict  their 
own  consumption  so  that  the  needs  of  our  fighters 
may  be  provided,  and  enforced  through  the  action 
of  the  Government  in  taking  taxes  and  inflating  the 
currency,  is  very  much  greater  than  it  was  before 
the  war  ;  probably  at  least  twice  as  much  when  all 
allowance  has  been  made  for  depreciation  of  the 
currency.  Some  people  think  that  this  saving  lesson 
will  have  been  learned,  will  have  become  a  habit,  will 
continue  and  will  grow.  If  so,  if  people  save  a  larger 
proportion  of  their  income  than  they  did  before,  and 
if  the  total  output  of  goods  is  increased,  as  it  easily 
may  be,  it  becomes  at  once  evident  that  there  is  a 
possibility  of  a  freer  supply  of  capital  for  industry 
than  has  ever  been  seen.  But  in  looking  at  this 
hopeful  and  optimistic  picture,  we  must  never  forget 
that  it  can  only  be  painted  by  those  who  are  prepared 
to  leave  out  of  the  canvas  all  the  danger  of  industrial 
strife  and  dislocation,  and  all  the  danger  of  reaction 
to  the  old  habits  of  luxurious  spending  which  are  so 
strong  a  possibility  in  the  other  direction.  The  war 
has  shown  us  how  we  can,  if  we  like,  increase  pro- 
duction, reduce  consumption,  and  so  have  a  larger 
margin  than  ever  before  to  he  put  into  providing 
capital  for  industry.  Whether  we  really  have  learned 
these  lessons  and  will  apply  them  remains  to  be  seen. 
There  is  also  a  possibility  that  some  people  may 
recognise  that  saving  money  and  applying  it  to  the 
re-equipment  of  the  world  for  peace  industry  is  a 
patriotically  praiseworthy  object  not  less  than  saving 


TAXING   CAPITAL  n 

in  time  of  war  for  the  equipment  of  the  Army.  It 
may  be  that  the  benefit  conferred  by  those  who  save, 
in  increasing  the  output  of  mankind,  will  be  more 
generally  recognised,  and  that  the  supply  of  capital 
may,  when  the  war  is  over,  be  increased  on  patriotic 
grounds,  or  on  grounds  even  wider  than  mere 
patriotism — a  desire  to  help  a  great  stride  forward 
in  the  material  welfare  of  mankind. 

Capital  is  a  very  tender  plant,  and  it  will  be  very 
easy,  if  mistakes  are  made,  to  frighten  those  who  see 
the  benefits  of  accumulation  for  themselves  and 
others.  Labour  troubles  and  industrial  unrest  are 
extremely  likely  to  have  the  effect  of  destroying 
capital  by  preventing  it  coming  into  existence.  If 
we  remember  that  capital  can  only  be  created  by 
being  saved,  it  becomes  evident  that  if  those  who 
save  are  threatened  with  too  deep  an  inroad  into 
their  reward  for  so  doing,  on  the  part  of  labour,  they 
will  hesitate  to  save  ;  and  if  the  action  of  labour  has 
this  effect,  labour  will  be  sawing  off  the  bough  on 
which  it  sits.  For  it  is  new  capital  that  sets  new 
industry  going,  and  it  is  only  by  a  continual  supply 
of  new  industry  that  a  continual  demand  for  fresh 
labour  can  be  maintained. 

There  is  also  at  present  much  mischievous  talk 
about  a  great  tax  on  capital  for  the  purpose  of 
redeeming,  or  hastening  the  redemption  of,  war  debt. 
It  is  clear  at  once  that  it  is  not  possible  to  tax  capital 
if  we  remember  that  capital  consists  of  the  tools  and 
equipment  of  industry,  or  even,  in  the  wider  sense 
of  the  word,  of  accumulated  assets  which  have  not 
been  consumed.  Unless  the  Government  is  pre- 


12         THE  OUTLOOK  FOR  CAPITAL 

pared  to  take  payment  in  factory  chimneys,  railway 
sleepers,  houses  and  fields,  or  the  securities  and 
mortgages  that  are  claims  on  their  product,  it  is  not 
possible  to  tax  capital.  The  only  thing  that  the 
Government  can  tax  is  the  output,  that  is  to  say,  the 
annual  income  of  the  people.  In  other  words,  a  tax 
on  capital  is  simply  a  form  of  income  tax  assessed, 
not  according  to  a  man's  income,  but  according  to 
the  assets  of  which  he  is  possessed.  The  effect  of 
such  a  tax  would  be  that  he  who  has  spent  everything 
that  he  has  earned  on  his  own  enjoyment  would  go 
scot  free  in  the  matter  of  the  capital  tax,  and  would 
be  rewarded  for  his  improvidence  by  being  asked  to 
make  no  sacrifice  ;  while  his  thrifty  brother  who,  out 
of  a  smaller  income,  has  set  aside  a  certain  proportion 
during  the  last  twenty  or  thirty  years,  would  have 
to  hand  over  a  portion  of  his  current  income  assessed 
upon  the  value  of  the  assets  into  which  he  has  put 
his  savings.  Incidentally,  it  may  be  remarked  that 
it  would  take  years  to  make  this  necessary  valuation, 
and  that  it  would  probably  be  done  in  a  very  inequit- 
able manner  by  untrained  and  incompetent  officials. 
But  the  important  point  is  this,  that  if  the  Govern- 
ment shows  a  tendency  to  take  the  possession  of 
assets  as  a  basis  for  taxation  it  will  be  directly 
encouraging  those  who  spend  their  whole  income  in 
riotous  living  and  frivolous  amusement,  and  dis- 
couraging those  who  help  to  increase  mankind's 
output  by  adding  to  the  capital  available. 

Finally,  it  may  be  added  that  the  shyness  of  the 
saver  will  be  greatly  diminished  if  he  can  feel  that 
there  is  a  trustworthy  machinery  of  company 


THE   SWINDLED    INVESTOR  13 

promotion,  so  that  he  can  rely  on  any  savings  that 
he  puts  into  industry  having  at  least  a  fair  chance  of 
yielding  him  a  fair  reward.  This  subject  is  too  vast 
to  enter  into  at  present,  but  it  is  one  to  which  those 
who  are  responsible  for  the  management  of  our 
financial  affairs  cannot  give  too  much  attention. 
Every  time  the  real  investor  is  swindled  out  of  his 
money  there  is  more  than  a  chance  that  he  will  look 
upon  all  forms  of  saving  as  a  folly  to  be  left  to  the 
credulous.  It  is  easy  to  say  that  it  was  his  own  fault, 
that  he  ought  to  have  been  more  careful,  or  consulted 
a  better  broker  ;  but  he  will,  with  equal  ease,  retort 
that  if  honest  financiers  knew  their  business  better, 
they  would  have  long  ago  made  things  easier  for  the 
ignorant  investor  to  know  whether  he  was  putting 
his  money  into  genuine  enterprise  or  throwing  it 
down  a  sink. 

Like  all  other  divagations  on  the  subject  of  what 
may  happen  in  the  future,  this  attempt  to  forecast 
has  necessarily  consisted  of  "  dim  glimpses  into  the 
obvious,"  as  the  undergraduate  said  of  Jowett's 
sermon.  All  that  we  can  be  sure  of  is  this  :  that  if 
the  great  opportunities  that  will  lie  open  to  mankind 
at  the  end  of  the  war  are  rightly  used,  if  we  use  its 
lessons  to  increase  our  production,  restrict  our 
frivolous  consumption,  and  put  a  larger  proportion 
of  our  larger  production  into  stimulating  production 
still  further,  there  ought  to  be  a  great  increase  in  the 
amount  of  capital  available  to  supply  the  great 
increase  which  may  be  expected  in  the  amount  of 
capital  demanded.  The  fact  that  the  chief  nations 
of  the  world  will  have  enormous  debts  on  which  to 


14         THE  OUTLOOK  FOR  CAPITAL 

pay  interest  is  not  one  that  need  necessarily  terrify 
us  from  this  point  of  view.  The  arranging  and  im- 
position of  the  taxation  necessary  for  meeting  the 
interest  on  these  debts  will  involve  very  serious 
political  and  social  questions ;  but  the  payment  of 
this  interest  need  not  necessarily  diminish  production, 
and  it  may  probably  help  in  checking  consumption. 
It  will  not  impair  the  total  wealth  of  the  world  as  a 
whole  ;  it  will  merely  affect  its  distribution.  And 
since  it  will  mean  that  a  considerable  part  of  the 
world's  output  will,  for  this  reason,  be  handed  over 
to  the  holders  of  the  various  Government  debts, 
who,  ex  hypothesi,  will  be  people  who  have  saved 
money  in  the  past,  it  is  at  least  possible  that  they 
may  devote  a  considerable  amount  of  the  sum  so 
received  to  further  saving  or  increasing  the  supply 
of  capital  available. 


II 

LONDON'S  FINANCIAL    POSITION 

October,  1917 

London  after  the  War — A  German  View — The  Rocks  Ahead— 
Our  Relative  Position  secure — Faulty  Finance — The  Strength 
we  have  shown — The  Nature  and  Limits  of  American 
Competition — No  other  likely  Rivals. 

WILL  the  prestige  of  the  London  money  market  be 
maintained  when  the  war  is  over  ?  This  is  a  question 
of  enormous  importance,  not  only  to  every  one  who 
works  in  and  about  the  City,  but  to  all  who  are 
interested  in  the  maintenance  and  increase  of 
England's  wealth.  Like  all  other  questions  about 
what  is  going  to  happen  some  day,  the  answer  to  it 
will  depend  to  a  very  great  extent  on  what  happens 
between  the  present  moment  and  the  return  of  peace. 
To  arrive  at  an  answer  we  have  first  to  consider  on 
what  London's  financial  prestige  has  been  based  in 
the  past,  and  on  this  subject  we  are  able  to  cite  in 
evidence  the  opinion  of  an  enemy..  Our  own  views 
about  the  reasons  which  gave  us  financial  eminence 
may  well  be  coloured  by  national  and  patriotic 
prejudice,  but  when  we  take  the  opinion  of  a  German 
we  may  be  pretty  sure  that  it  is  not  warped  by  any 
predisposition  in  favour  of  English  character  and 
achievement. 


16       LONDON'S  FINANCIAL  POSITION 

A  little  book  published  this  year  by  Messrs. 
Macmillan  and  Co.,  entitled  "  England's  Financial 
Supremacy,"  contains  a  translation  of  a  series  of 
articles  from  the  Frankfurter  Zeitung,  and  from  this 
witness  we  are  able  to  get  some  information  which 
may  be  valuable,  and  is  certainly  interesting. 

The  basis  of  England's  financial  supremacy  is 
recapitulated  as  follows  by  this  devil's  advocate  :— 

"  The  influence  of  history,  a  mighty  empire,  a  cosmo- 
politan Stock  Exchange,  intimate  business  connections 
throughout  the  whole  world,  cheap  money,  a  free  gold 
market,  steady  exchanges,  an  almost  unlimited  market 
for  capital  and  an  excellent  credit  system,  an  elastic 
system  of  company  legislation,  a  model  Insurance  organi- 
sation and  the  help  of  Germans,  these  are  the  factors  that 
have  created  England's  financial  supremacy.  Perhaps 
we  have  omitted  one  other  factor,  the  errors  and  omis- 
sions of  other  nations." 

Coming  closer  to  detail,  our  critic  says,  with 
regard  to  the  international  nature  of  the  business 
done  on  the  London  Stock  Exchange  :— 

"  In  recent  years  London  had  almost  lost  its  place  as 
the  busiest  stock  market  in  the  world.  New  York,  as  a 
rule,  Berlin  on  many  occasions,  could  show  more  dealings 
than  London.  But  there  was  no  denying  the  inter- 
national character  of  its  business.  This  was  due  to  Eng- 
land's position  of  company  promoter  and  money  lender 
to  the  world  ;  to  the  way  in  which  new  capital  was  issued 
there  ;  to  its  Stock  Exchange  rules,  so  independent  of 
legislative  and  Treasury  interference  ;  to  the  international 
character  of  its  Stock  Exchange  members,  and  to  the 
cosmopolitan  character  of  its  clients." 

On  the  subject  of  our  Insurance  business  and  the 
fair-mindedness  and  quickness  of  settlement  with 


GERMAN    NARROWNESS  17 

which  it  was  conducted,   we  can  cite  the  same 
witness  as  follows  : — 

"  Insurance,  again,  represented  by  the  well-known 
organisation  of  Lloyds,  which  in  form  is  something 
between  a  stock  exchange  and  a  co-operative  partnership, 
is  nowhere  more  elastic  and  adaptable  than  in  London. 
It  must  be  said,  to  the  credit  of  Lloyds,  that  anyone  ask- 
ing to  be  insured  there  was  never  hindered  by  bureau- 
cratic restrictions,  and  always  found  his  wishes  met  to  the 
furthest  possible  extent.  The  agencies  of  Lloyds  abroad 
are  also  so  arranged  that  both  the  insured  and  the  insurer 
can  have  their  claims  settled  quickly  and  equitably/' 

But  one  of  the  most  remarkable  tributes  to  a 
quality  with  which  Englishmen  are  seldom  credited, 
and  one  of  the  frankest  confessions  of  a  complete 
absence  of  this  quality  in  our  German  rivals,  is  con- 
tained in  the  following  passage  :— 

"  A  further  bad  habit,  harmful  to  our  economic  deve- 
lopment, is  narrow-mindedness.  This,  too,  is  very  pre- 
valent in  Germany — and  elsewhere  as  well.  And  this  is 
not  surprising.  Even  among  the  generation  which  is 
active  to-day,  the  older  members  grew  up  at  a  time  when 
possibilities  of  development  were  restricted  and  environ- 
ment was  narrow.  With  commendable  foresight  many 
of  these  older  men  have  freed  themselves  from  this  petty 
spirit,  and  are  second  to  none  in  enterprise  and  energy. 
Germany  can  be  as  proud  of  its  '  captains  of  industry  '  as 
America  itself.  But  many  commercial  circles  in  Ger- 
many are  still  unable  to  free  themselves  from  these 
shackles.  The  relations  between  buyer  and  seller  are 
still  often  disturbed  by  petty  quibbling.  In  those  indus- 
tries where  cartels  and  syndicates  have  not  yet  been 
formed,  too  great  a  r61e  is  played  by  dubious  practices 
of  many  kinds,  by  infringements  of  payment  stipulations, 
by  unjustifiable  deductions,  etc.,  while,  on  the  other 
hand,  the  cartels  are  often  too  ruthless  in  their  action. 


18       LONDON'S  FINANCIAL  POSITION 

In  this  field  we  have  very  much  to  learn  from  the  English 
business  man.  Long  commercial  tradition  and  interna- 
tional business  experience  have  taught  him  long  ago  that 
broad-mindedness  is  the  best  business  principle.  Look  at 
the  English  form  of  contract,  the  methods  of  insurance 
companies,  the  settlement  of  business  disputes  1  You 
will  find  no  narrow-mindedness  there.  Tolerance, 
another  quality  which  the  German  lacks,  has  been  of  great 
practical  advantage  to  the  Englishman.  Until  recently 
the  City  has  never  resented  the  settlement  of  foreigners, 
who  were  soon  able  to  win  positions  of  importance 
there.  Can  one  imagine  that  in  Berlin  an  Italian  or  a 
South  American,  with  very  little  knowledge  of  the  German 
language,  would  be  not  only  entrusted  with  the  manage- 
ment of  leading  banks  and  companies,  but  would  be 
allowed  in  German  clubs  to  lay  down — in  their  faulty 
German — the  law  as  to  the  way  in  which  Germany  should 
be  developed  ?  Impossible  !  Yet  this  could  be  seen 
again  and  again  in  England,  and  the  country  gained 
greatly  by  it.  If  the  English  have  now  developed  a 
hatred  of  the  foreigner,  it  only  means  that  the  end  of 
England's  supremacy  is  all  the  nearer." 

According  to  our  German  critic  the  great  fabric 
that  has  been  built  up  on  these  characteristics  and 
qualities  is  threatened  with  ruin  by  the  war ;  and 
the  heritage  which  we  are  supposed  to  be  losing  is 
to  fall,  by  some  process  which  is  not  made  very  clear, 
largely  into  the  hands  of  Berlin.  In  order  that  we 
may  not  be  accused  of  taking  the  laudatory  plums 
out  of  this  German  pudding  and  leaving  out  all 
criticisms  and  accusations,  let  us  quote  in  full  the 
passage  in  which  he  dances  in  anticipation  on 
London's  corpse  : — 

"  Let  us  sum  up.  England's  reputation  for  honest 
business  dealing  and  for  trustworthy  administration  has 


HOW  MUCH   TRUTH?  19 

suffered.  Her  insular  inviolability  has  been  put  in  ques- 
tion. The  ravages  »f  war  have  undermined  the  achieve- 
ments of  many  generations.  Her  free  gold  market  has 
broken  down.  The  flow  of  capital  towards  London  will 
fall  off,  for  those  who  cannot  borrow  there  will  no  longer 
send  deposits.  The  surplus  Ifhown  in  her  balance-sheet 
will  contract.  Foreign  trade  will  also  decrease.  Hand 
in  hand  with  this  fall,  free  trade,  that  mighty  agent  in 
the  development  of  England's  supremacy,  will,  in  all 
probability,  give  place  to  protection.  Stock  Exchange 
business  will  grow  less.  Rates  of  interest  will  be 
permanently  higher." 

How  much  truth  is  there  in  all  this  ?  Has  our 
reputation  for  honest  dealing  and  for  trustworthy 
administration  suffered  ?  Surely  not  in  the  eyes  of 
any  reasonable  and  unprejudiced  observer.  In  the 
course  of  the  greatest  war  in  history,  fought  by  Ger- 
many with  weapons  which  have  involved  the  viola- 
tion of  the  most  sacred  laws  of  humanity  and 
civilisation,  England  has  acted  with  a  respect  for  the 
interests  of  neutrals  which  has  been  severely  criticised 
by  impatient  observers  at  home.  As  for  our  "insular 
inviolability  "  having  been  put  in  question,  it  cer- 
tainly has  not,  so  far,  suffered  any  serious  damage. 
Our  Fleet  has  defended  us  from  invasion  with  com- 
plete success,  and  the  damage  done  by  marine  and 
aerial  raiders  to  our  property  on  shore  is  negligible. 
Our  free  gold  market  is  said  to  have  broken  down. 
The  proof  of  the  pudding  is  in  the  eating.  Germany, 
when  the  war  began,  immediately  relieved  the  Reichs- 
bank  from  any  obligation  of  meeting  its  notes  in  gold, 
and  frankly  went  on  to  a  paper  basis.  England  has 
already  shipped  well  over  200  millions  in  gold  to 


20       LONDON'S  FINANCIAL  POSITION 

America  to  finance  her  purchases  there  and  those  of 
her  Allies. 

It  may  be  true  that  capital  will  not  flow  to 
London  if  London  is  not  in  a  position  to  lend,  but  we 
see  no  reason  why  London  should  not  be  able  to 
resume  her  position  as  an  international  money  lender, 
not  perhaps  immediately  on  the  declaration  of  peace, 
but  as  soon  as  the  aftermath  of  war  has  been  cleared 
away  and  the  first  few  months  of  difficulty  and  danger 
have  been  passed.  The  prophecy  that  foreign  trade 
will  decrease  may  also  be  true  for  a  time  owing  to  the 
destruction  of  merchant  shipping  that  the  war  is 
causing.  This  possibility,  however,  may  be  remedied 
between  now  and  the  end  of  the  war  if  the  great  pro- 
grammes of  merchant  shipbuilding  which  have  been 
undertaken  by  the  British  and  American  Govern- 
ments are  duly  carried  out.  In  any  case,  even  if 
foreign  trade  decreases,  there  is  no  reason  whatever 
to  expect  that  England's  will  decrease  faster  than 
that  of  other  nations. 

In  all  these  problems  we  have  to  look  for  the 
relative  answer  and  to  consider  not  whether  England 
has  suffered  by  the  war,  for  it  is  most  obvious  that 
she  has,  but  whether  she  will  have  been  found  to 
have  suffered  more  than  any  competitor  who  may 
threaten  her  after-war  position. 

"  Free  trade,"  says  our  German  Jeremiah,  "  that 
mighty  agent  in  the  development  of  England's 
supremacy,  will,  in  all  probability,  give  place  to  pro- 
tection." We  venture  to  think  that  it  will  be  recog- 
nised that  the  Free  Trade  policy  of  the  past  gave  us 
a  well-distributed  wealth  which  was  an  invaluable 


THE    RELATIVE   POSITION  21 

weapon  in  time  of  war,  and  that  any  attempt  to 
impose  import  duties  when  peace  comes  will  be 
admitted,  even  by  the  most  ardent  Tariff  Reformers, 
as  untimely  when  there  is  likely  to  be  a  world-wide 
scramble  for  food  and  raw  materials,  and  the  one 
object  of  every  nation  will  be  to  get  them  wherever 
they  can  and  as  cheaply  as  they  can. 

If  Stock  Exchange  business  will  be  less,  though 
this  does  not  by  any  means  follow,  there  is  no  reason 
why  it  should  be  relatively  less  here  than  in  other 
centres.  As  to  rates  of  interest  being  permanently 
higher,  the  same  answer  applies.  It  may  be  true, 
but  there  is  no  reason  why  they  should  be  relatively 
higher  in  London  than  elsewhere ;  and,  if  they  are 
high,  it  will  be  because  there  will  be  a  great  demand 
for  capital,  which  will  mean  a  great  trade  expansion  ; 
both  in  the  provision  of  capital  and  in  meeting  the 
demands  of  trade  expansion  England  will  be  doing 
what  she  has  done  with  marked  success  in  the  past 
and  can,  if  she  works  in  the  right  way  now  and  after 
the  war,  do  again  with  equal  and  still  greater  success. 

There  is,  however,  a  danger  that  threatens  our 
financial  position  after  the  war,  on  the  subject  of 
which  our  German  critic  is  discreetly  silent,  because 
that  danger  threatens  the  position  of  Germany  very 
much  more  emphatically.  It  consists  in  the  way  in 
which  our  Government  is  at  present  meeting  the 
needs  of  war  finance,  not  by  compelling  economy  on 
the  civilian  population  through  taxation  and  borrow- 
ing direct  from  investors,  but  by  manufacturing 
currency  for  the  purposes  of  the  war  by  means  of  the 
printing  press  and  the  banking  machinery.  The 

c 


22       LONDON'S  FINANCIAL  POSITION 

effect  of  this  policy  is  seen  in  the  enormous  mass  of 
Treasury  notes  with  which  the  country  has  been 
flooded.  Their  total  is  now  nearly  180  millions  or 
perhaps  100  millions  more  than  the  gold  which  they 
were  originally  designed  to  replace. 

It  is  also  to  be  seen  in  the  great  increase  in  banking 
deposits  which  has  been  a  feature  of  our  financial 
history  since  the  war  began.  Some  people  regard 
this  feature  as  a  phenomenal  proof  of  the  growth  of 
our  wealth  during  the  war.  I  am  afraid  there  is 
little  foundation  for  this  pleasant  assumption,  for 
these  new  deposits  have  been  called  into  being  by 
the  banks  subscribing  to  Government  securities, 
whether  War  Loan,  Treasury  Bills,  Exchequer  Bonds 
or  Ways  and  Means  advances  or  lending  their 
customers  the  wherewithal  to  do  so.  By  this  process 
the  balance-sheets  of  the  banks  are  swollen  on  both 
sides;  by  the  Government  securities  and  advances  to 
customers  among  the  assets,  against  which  the  banks 
create  new  deposits,  so  giving  the  community  as  a 
whole  the  right  to  draw  more  cheques. 

Every  time  the  bank  makes  an  advance  it  gives 
the  borrower  a  credit  in  its  books,  that  is  to  say,  the 
right  to  draw  cheques  to  that  amount ;  the  borrower 
draws  on  the  credit  and  hands  it  to  any  one  to  whom 
he  owes  money ;  but  as  long  as  the  advance  is 
outstanding  there  will  be  a  deposit  out  against  it  in 
the  books  of  some  bank  or  another. 

It  is  an  easy  way  for  the  Government  to  finance 
the  war  by  getting  the  banks  to  manufacture  money 
for  it.  Nobody  feels  any  poorer  for  the  process,  in 
fact,  those  who  have  new  money  in  their  pockets  or 


BAD    WAR   FINANCE  23 

in  their  bank  balance  feel  richer,  but  the  result  of 
thus  multiplying  currency  without  any  increase  in 
the  supply  of  goods  and  services  to  be  bought  inevit- 
ably helps  the  rise  in  prices  which  makes  the  war 
costly,  puts  the  burden  of  it  on  to  the  wrong 
shoulders,  and  likewise  cheapens  the  value  of  the 
English  pound  as  measured  in  other  currencies.  This 
is  why  the  evils  involved  by  this  process  become  so 
relevant  to  the  question  now  at  issue. 

If  the  Government  is  allowed  to  go  on  financing 
the  war  by  increasing  the  currency  with  the  very 
reluctant  help  of  the  bankers,  the  difficulties  of 
maintaining  our  gold  standard  and  keeping  the 
exchanges  in  favour  of  London  will  be  very  greatly 
magnified  when  the  war  is  over  and  our  gold  reserves 
are  no  longer  protected  by  the  submarines  and  the 
high  cost  of  shipping  gold  that  they  produce.  It 
therefore  follows  that  all  who  have  the  true  interests 
of  the  City  at  heart  should  use  all  the  influence  they 
can  to  force  the  Government  to  adopt  a  sounder 
financial  policy  before  it  is  too  late. 

It  is  true  that  our  war  finance  has  hitherto  been 
sounder  than  that  of  any  other  warring  Power,  but 
it  has  fallen  very  short  if  we  apply  the  rough  test 
of  the  proportion  of  the  cost  of  war  borne  out  of 
taxation  and  compare  our  performance  with  the 
results  achieved  by  our  ancestors  in  the  Napoleonic 
and  Crimean  wars. 

If  we  have  done  better  than  France,  Italy, 
Russia  and  Germany  in  this  respect,  it  must  also  be 
remembered  that  the  financial  prestige  which  these 
countries  had  to  maintain  was  not  nearly  so  great 


24       LONDON'S   FINANCIAL    POSITION 

and  well  established  as  ours,  with  the  possible 
exception  of  France  ;  and  France,  being  exposed  to 
the  ravages  of  a  ruthless  invader,  was  in  a  position 
which  put  special  obstacles  in  the  way  of  the  canons 
of  sound  finance. 

If,  then,  there  are  certain  dangers  that  threaten 
our  financial  position  when  the  war  is  over,  we  must 
remember,  on  the  other  hand,  that  the  war  has 
already  done  a  great  deal  to  maintain  our  financial 
prestige  and  raise  it  to  a  height  at  which  it  never 
stood  before. 

When  the  war  began  we  were  expected  to  finance 
the  Allies,  to  keep  the  seas  clear  and  put  a  small 
Expeditionary  Force  to  support  the  left  flank  of 
the  French  Army,  and  to  do  these  things  during  a 
contest  which  was  expected  by  the  consensus  of 
expert  opinion  to  last  not  more  than  a  few  months. 
All  these  things  we  accomplished,  and  we  were  the 
only  Power  at  war  which  did  actually  accomplish 
all  that  it  was  expected  and  asked  to  do.  More 
than  that,  we  also  undertook  a  great  task  which  was 
not  in  our  programme ;  we  created  a  great  army 
on  a  Continental  scale,  and,  at  the  same  time,  con- 
tinued to  carry  out  the  other  tasks  which  had  been 
assigned  to  us. 

All  these  things  we  did,  and  that  we  should  have 
done  them  was  evidence  of  economic  strength  and 
adaptability  which  have  astonished  the  world.  To 
have  financed  the  Allies  and  ourselves  as  long  as  we 
did  would  have  been  comparatively  easy  if  our 
population  could  have  been  left  at  work  to  turn  out 
the  stuff  and  services,  the  provision  of  which  are 


AMERICA'S  ADVANCE  25 

implied  by  financing  ;  but  for  us  to  have  been  able 
to  do  it  and  at  the  same  time  to  improvise  an  army 
which  is  now  consistently  and  regularly  beating  the 
Germans  is  an  achievement  which  will  inevitably 
raise  the  world's  opinion  of  our  economic  strength, 
on  which  financial  prestige  is  ultimately  based. 

But,  as  it  has  been  said,  in  discussing  this  question 
we  have  to  look  at  it  all  the  time  from  the  relative 
point  of  view.  How  will  our  prestige  be  when  the 
war  is  over,  not  as  compared  with  what  it  was 
before  the  war,  but  as  compared  with  what  any  other 
rival  in  any  other  part  of  the  world  can  show  ? 
Here  we  have  to  acknowledge  at  once,  freely  and 
frankly,  that,  as  compared  with  New  York,  we  shall 
have  gone  backward. 

America  will  have  been  enormously  enriched  by 
the  war,  which  we  shall  certainly  have  not.  America 
will  have  been  opening  up  channels  of  international 
trade  and  international  finance,  and  so  New  York 
will  have  been  gaining  at  the  expense  of  London. 
It  is  certain  that  when  the  war  is  over  America's 
dependence  upon  London  for  credits  against  the 
shipments  of  goods  to  and  from  her  shores  will  have 
been  very  greatly  lessened,  if  not  altogether  a  thing 
of  the  past. 

This  change  would  have  happened  any  way,  war 
or  no  war,  but  it  has  been  greatly  quickened  by  the 
war.  Before  the  war  America  was  already  making 
arrangements,  under  her  new  banking  system,  to 
promote  the  machinery  for  acceptance  and  dis- 
count, in  order  that  goods  sent  to  her  from  foreign 
countries  should  be  financed  by  bills  drawn  on 


26       LONDON'S  FINANCIAL  POSITION 

American  banks  and  houses  in  dollars  instead  of  on 
English  banks  and  houses  in  sterling. 

Apart  from  this  development,  which  would  have 
happened  in  any  case,  it  remains  to  be  seen  how  far 
New  York  will  be  in  a  position  to  act  as  a  rival  of 
London  as  the  world's  financial  centre.  The  internal 
resources  and  potentialities  of  America  are  so 
enormous,  and  there  is  such  a  vast  amount  of  work 
to  be  done  in  developing  them  and  bringing  them  to 
full  fruition,  that  it  does  not  at  all  follow  that 
America  will  yet  be  inclined  to  take  the  position  in 
international  trade  and  finance  which  will  one  day 
surely  be  hers,  when  she  has  done  all  the  work  that 
is  waiting  to  be  done  in  her  own  back  premises. 

America  has  a  new  banking  and  monetary 
system  on  trial  which  has  met  the  difficult  problems 
of  the  war  with  great  success.  These  problems, 
however,  are  not  nearly  as  complicated  and  various 
as  those  which  are  likely  to  arise  in  time  of  peace. 
When  a  nation  is  turning  out  an  enormous  amount 
of  goods  for  which  the  rest  of  the  world  is  prepared 
to  pay  any  price,  her  finance  is  a  comparatively 
simple  business.  Even  now,  when  America  has 
assumed  the  duty  of  financing  a  large  number  of 
Allies  impoverished  by  three  years  of  war  which 
have  been  enriching  her,  she  is  still  simplifying  the 
problem  by  restricting  her  advances  to  the  payment 
for  goods  bought  in  America. 

That  New  York  will  be  greatly  strengthened  by 
the  war,  which  has  brought  masses  of  American 
securities  back  to  the  country  of  origin  and  has  put 
into  the  hands  of  American  bankers  and  investors 


THE  GEOGRAPHICAL  ASPECT          27 

large  blocks  of  European  promises  to  pay,  is  as  clear 
as  noonday ;  but  whether  when  the  war  is  over 
New  York  will  care  to  be  bothered  much  with 
problems  of  international  finance  remains  to  be  seen. 
In  the  first  place,  the  claims  of  her  own  country  upon 
her  financial  resources  will  be  insatiable  and  im- 
perative. In  the  second  place,  the  business  of 
international  finance  is  carried  out  on  very  finely 
cut  terms  ;  and  the  Americans  being  accustomed  to 
the  fat  rates  of  profit  which  business  at  home  has 
given  them  may  not  care  to  devote  much  attention 
to  the  international  market,  in  which  the  risks  are 
big,  the  turnover  is  enormous  and  the  profits  very 
finely  cut.  It  has  been  remarked  by  a  shrewd 
observer  that  the  Americans  will  never  do  business 
for  a  thirty-second. 

In  the  third  place,  it  must  be  remembered  that 
the  geographical  position  of  London  is  more  favour- 
able than  that  of  New  York  as  a  world  centre,  as 
the  world  is  at  present  constituted.  England, 
anchored  off  the  coast  of  Europe,  is  clearly  marked  as 
the  depot  for  the  entrepot  trade  of  the  Old  and  New 
Worlds.  New  York  is  clearly  marked  as  the  centre 
for  the  trade  of  the  Western  hemisphere,  and  it  is 
likely  enough  that  New  York  and  London,  acting 
together  as  the  financial  chiefs  of  the  two  hemi- 
spheres, may  be  gradually  united  into  what  is 
practically  one  market  by  the  growing  ties  of  mutual 
interest. 

With  regard  to  the  position  of  other  possible 
rivals  to  London's  position,  it  need  only  be  said  that 
they  have  certainly  been  weakened  much  more 


28       LONDON'S  FINANCIAL  POSITION 

rapidly  than  has  London  during  the  course  of  the 
war.  Paris,  threatened  by  the  near  approach  of  an 
invading  foe,  has  inevitably  suffered  much  more 
severely  than  London,  and  is  likely  to  take  longer 
in  recovering  the  great  position  as  a  provider  of 
capital  which  was  given  to  her  by  the  thrift  of  the 
average  French  citizen.  Every  one  expects  with  con- 
fidence to  see,  when  the  war  is  over,  a  miraculous 
recovery  in  France  produced  by  the  same  spirit 
which  worked  miracles  after  the  war  of  1871,  aided 
and  abetted  by  the  subsequent  improvement  in 
man's  control  over  the  forces  of  nature,  and  also  by 
the  deep  and  world- wide  sympathy  which  all  will 
feel  for  France  as  the  champion  of  freedom  who  has 
suffered  most  severely  in  its  cause  during  the  war. 
But  it  is  impossible  to  expect,  after  what  France 
has  suffered,  that  she  will  be,  for  some  time,  in  a 
position  seriously  to  challenge  London  as  a  financial 
rival.  All  Englishmen  will  hope  that  the  day  when 
she  will  be  in  a  position  to  challenge  us  again  will 
come  quickly. 

As  to  Berlin,  the  only  other  possible  rival  to 
London  in  Europe,  very  little  need  be  said.  The 
German  authority  quoted  above  has  already  shown 
some  of  the  difficulties  with  which  Berlin  has  to 
struggle.  He  spoke  of  the  narrow-mindedness  of 
German  finance,  of  the  "  petty  quibbling  "  which 
often  disturbs  the  relations  between  buyer  and  seller, 
of  the  "  dubious  practices  of  many  kinds,  infringe- 
ments of  payment  stipulations,  unjustifiable  deduc- 
tions," etc.,  and  the  "  ruthless  "  action  of  the  cartels. 
He  acknowledges  that  though  Germany  had  a  gold 


BERLIN'S   DIFFICULTIES  29 

standard  "  too  much  anxiety  used  to  be  shown  when 
the  gold  export  point  was  reached/'  and  that  "  it  was 
also  feared  that  to  export  gold  would  incur  the  wrath 
of  the  Reichsbank." 

With  these  disadvantages  to  struggle  against, 
quoted  from  the  mouth  of  a  German  observer, 
Germany  has  also  succeeded  by  her  ruthless  policy 
during  the  war  in  earning  the  deep  hostility  of  the 
greater  part  of  mankind.  Sentiment  probably  enters 
into  business  relations  a  good  deal  more  than  most 
business  men  admit,  and  for  any  country  to  set  out 
to  gain  the  leadership  in  trade  and  finance  by  out- 
raging the  feelings  of  most  of  its  possible  customers 
is  an  extraordinary  piece  of  stupidity. 

It  seems,  then,  that  apart  from  the  relative 
weakening  of  London  as  compared  with  New  York, 
there  is  very  little  need  for  us  to  fear  any  serious 
change  in  England's  financial  position  after  the  war 
as  long  as  the  Government's  faulty  finance  is  not 
allowed  too  seriously  to  endanger  the  position  of  our 
gold  standard.  It  is  true  that  we  shall  not  benefit, 
as  much  as  we  undoubtedly  have  in  the  past,  from 
the  "  help  of  Germans  "  in  developing  our  finance. 
But  indirectly  the  Germans  will  still  be  helping  us 
by  the  great  stimulus  that  the  war  will  have  given 
us  towards  efficiency  and  hard  work. 

What  we  have  to  do  in  order  to  secure  London's 
position  after  the  war  is  to  restore  as  soon  as  we  can 
the  system  that  had  established  it  in  the  century 
before  the  war.  We  have  to  show  the  world  that, 
far  from  any  intention  to  abandon  Free  Trade,  we 
mean  to  take  a  long  step  forward  along  the  line  of 


30       LONDON'S  FINANCIAL  POSITION 

international  activity  which  has  been  the  source  of 
our  greatness  in  the  past.  We  want,  as  soon  as 
possible,  to  get  back  that  freedom  from  Government 
control  which  has  given  us  such  elasticity  and 
adaptability  to  our  money  market,  our  Stock 
Exchange  and  our  Insurance  business.  A  certain 
amount  of  Government  control  will  inevitably  have 
to  continue  for  a  time  after  the  war,  but  the  sooner 
we  rid  ourselves  of  it  the  sooner  we  shall  restore  to 
the  London  money  market  those  qualities  which, 
after  the  reputation  that  it  has  for  honesty,  sound- 
ness and  straight  dealing,  were  most  helpful  in 
building  up  its  eminence. 

Above  all,  we  have  to  work  hard  both  in  finance 
and  industry  and  commerce.  Finance,  which  is  the 
machinery  for  handling  claims  for  goods  and  services, 
can  only  be  active  and  effective  if  industry  and  com- 
merce are  active  and  effective  behind  it,  turning  out 
the  goods  and  services  to  meet  the  claims  that 
finance  creates.  A  great  industrial  and  commercial 
output,  with  severe  restriction  of  unnecessary  con- 
sumption so  that  a  great  margin  may  go  into  capital 
equipment,  will  soon  repair  the  ravages  of  war, 
bring  down  the  price  of  credit  and  of  capital  and 
make  London  once  more  the  place  in  which  these 
things  are  most  cheaply  and  freely  to  be  bought. 

Finally,  if  we  want  to  restore  London  as  a  place 
in  which  all  the  financial  transactions  of  the  world 
were  centred,  we  must  remember  that  we  cannot  do  so 
if  we  restrict  the  facilities  given  to  foreigners  to  come 
here  and  settle  and  do  business.  It  is  not  possible  to 
be  an  international  centre  with  an  insular  sentiment. 


Ill 

FINANCE  AS  IT  MIGHT  HAVE 
BEEN— I 

November,  1917 

Financial  Conditions  in  August,  1914 — No  Scheme  prepared  to 
meet  the  Possibility  of  War — A  Short  Struggle  expected — 
The  Importance  of  Finance  as  a  Weapon — Labour's  Example 
— The  Economic  Problem  of  War — The  Advantages  of  Direct 
Taxation — The  Government  follows  the  Path  of  Least 
Resistance — The  Effect  of  Currency  Inflation. 

A  LEGEND  current  in  the  City  says  that  the  Imperial 
War  Committee,  or  whatever  was  the  august  body 
entrusted  with  the  task  of  thinking  out  war  problems 
beforehand,  had  done  its  work  with  regard  to  the 
Army  and  Navy,  transport  and  provision,  and 
everything  else  that  we  should  want  for  the  war, 
and  were  going  on  to  the  question  of  finance  next 
week,  when  the  war  intervened.  Whatever  may  be 
the  truth  of  this  story,  the  events  of  the  war  confirm 
the  opinion  that  if  it  was  not  true  it  ought  to  have 
been.  We  are  continually  accused  of  not  having 
been  ready  for  the  war  ;  but,  in  fact,  we  were  quite 
ready  to  do  everything  that  we  had  promised  to  do 
with  regard  to  military  and  naval  operations.  Our 
Navy  was  ready  in  its  place  in  the  fighting  line,  and 


32  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

the  dispatch  with  which  our  Expeditionary  Force 
was  collected  from  all  parts  of  the  kingdom,  and 
shipped  across  to  France,  was  a  miracle  of  efficiency 
and  practical  organisation.  It  is  true  that  we  had 
not  got  an  Army  on  a  Continental  scale,  but  it  was 
no  part  of  our  contract  that  we  should  have  one. 
The  fighting  on  land  was  in  those  days  expected  to 
be  done  by  our  Allies,  assisted  by  a  small  British 
force  on  the  left  flank  of  the  French  Army,  lhat 
British  force  was  duly  there,  and  circumstances 
which  were  quite  unforeseen  made  it  necessary  for 
us  to  undertake  a  task  which  was  no  part  of  our 
original  programme  and  create  an  Army  on  a 
Continental  scale,  in  addition  to  doing  everything 
that  we  had  promised  beforehand  to  a  much  greater 
extent  than  was  in  the  bargain. 

But  in  finance  there  was  no  evidence  that  any 
thought-out  policy  had  been  arrived  at  in  order  to 
make  the  best  possible  use  of  the  nation's  economic 
resources  for  the  war  when  it  came.  The  acute 
crisis  in  the  City  which  occurred  in  August,  1914, 
was  a  minor  matter  which  hardly  affected  the 
subsequent  history  of  our  war  finance  except  by 
giving  dangerous  evidence  of  the  ease  by  which 
financial  problems  can  be  apparently  surmounted 
by  the  simple  method  of  creating  banking  credits. 
That  crisis  merely  arose  from  the  fact  that  we  were 
so  strong  financially,  and  had  so  great  a  hold  upon 
the  finance  of  other  countries  in  the  world,  that  when 
we  decided,  owing  to  stress  of  war,  to  leave  off 
lending  to  foreigners  and  to  call  in  loans  that  we 
had  made  by  way  of  accepting  and  bill-discounting 


THE  OPENING  CRISIS  33 

arrangements,  the  whole  machinery  of  exchange 
broke  down  because  from  all  over  the  world  the 
market  in  exchange  went  one  way.  Everybody 
wanted  to  buy  bills  on  London,  and  there  were  no 
bills  to  be  had. 

There  was  also  the  internal  problem  which  arose 
because  some  of  the  public  and  some  of  the  banks 
took  to  the  evil  practice  of  hoarding  gold  just  at  the 
wrong  moment,  and  consequently  there  was  no 
available  supply  of  legal  tender  currency  except  in 
the  shape  of  Bank  of  England  notes,  the  smallest 
denomination  of  which  is  £5.  It  is  known  that  our 
bankers  had  long  before  pointed  out  to  the  Treasury 
that  if  ever  a  banking  crisis  arose  there  would,  or 
might  be,  this  demand  for  a  paper  currency  of 
smaller  denominations  than  £5  ;  this  suggestion  got 
into  a  pigeon-hole  at  the  Treasury  and  was  deep 
under  the  dust  of  Whitehall  by  the  time  experience 
proved  how  big  a  gap  in  our  financial  armour  had 
been  made  by  its  neglect.  If  the  £i  notes,  with 
which  we  are  now  so  familiar,  had  been  ready  when 
the  war  broke  out,  or,  still  better,  if  the  Bank  of 
England  had  been  empowered  and  instructed  to 
have  an  issue  of  its  own  £i  notes  ready,  it  may  at 
least  be  contended  that  the  moratorium,  which  was 
so  bad  a  financial  beginning  of  the  war,  might  have 
been  avoided. 

But  this  opening  crisis  was  a  short-lived  matter, 
and  was  promptly  dealt  with,  thanks  to  the  energy 
and  courage  of  Mr  Lloyd  George,  who  was  then 
Chancellor  of  the  Exchequer,  and  saw  that  things 
had  to  be  done  quickly,  and  took  the  advice  of  the 


34  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

City  as  to  what  had  to  be  done.  The  measures 
then  employed  erred,  if  at  all,  on  the  side  of  doing 
too  much,  which  was  certainly  a  mistake  in  the 
right  direction  if  in  any.  What  is  much  more 
evident  is  the  fact  that  not  only  had  there  been  no 
attempt  to  provide  against  just  such  a  jolt  to  our 
financial  machine  as  took  place  when  the  war  began, 
but  that,  quite  apart  from  the  financial  machinery 
of  the  City,  no  reasoned  and  thought-out  attention 
had  been  given  to  the  great  problems  of  govern- 
mental finance  which  war  on  such  a  scale  brought 
with  it.  There  is,  of  course,  the  excuse  that  nobody 
expected  the  war  to  be  on  this  scale,  or  to  last  so 
long.  The  general  view  was  that  the  struggle  would 
be  over  in  a  few  months,  and  must  certainly  be  so 
if  for  no  other  reason  because  the  economic  strain 
would  be  so  great  that  the  nations  of  Europe  could 
not  stand  it  for  a  long  time.  On  the  other  hand,  we 
must  remember  that  Lord  Kitchener,  whom  most 
men  then  regarded  as  representing  all  that  was  most 
trustworthy  in  military  opinion,  made  arrangements 
from  the  beginning  on  the  assumption  that  the  war 
might  last  for  three  years.  So,  while  some  excuse 
may  be  made  for  our  lack  of  financial  foresight,  it 
does  seem  to  have  been  the  duty  of  those  whose 
business  it  is  to  manage  our  finances  to  have  thought 
out  a  complete  scheme  to  be  adopted  in  case  of  war 
if  at  any  time  we  should  be  involved  in  one  on  a 
European  scale.  Instead  of  which,  not  only  would 
it  appear  that  no  such  endeavour  had  been  made  by 
our  Treasury  experts  before  the  war,  but  that  no 
such  endeavour  has  ever  been  made  by  them  since 


THE  LACK  OF  PLAN  35 

the  war  began.  All  through  the  war's  history  many 
of  the  country's  mistakes  have  been  based  on  the 
encouraging  conviction  that  the  war  would  be  over 
in  the  next  six  months.  This  conviction  is  still 
cherished  to  this  day,  and  there  can  be  no  doubt  that 
if  those  who  cherish  it  hold  on  to  it  long  enough  they 
will  come  right  some  day. 

But  if  delusions  of  this  kind  may  be  fairly 
excused  in  the  man  in  the  street,  they  do  not  seem 
to  be  any  excuse  for  those  who  are  responsible  for 
our  finance  for  their  total  lack  of  a  thought-out 
scheme  at  the  beginning  of  the  war,  and  their  total 
failure  to  produce  one  as  the  war  went  on.  We  have 
financed  the  war  by  haphazard  methods,  limping 
along  the  line  of  least  resistance.  We  are  con- 
tinuing to  do  so,  and  we  may  do  so  to  the  end, 
though  there  are  now  growing  signs  of  an  impatience 
both  among  the  property-owning  classes  and  others 
of  the  system  by  which  we  are  financing  the  war  by 
piling  up  debt  and  manufacturing  banking  credits. 

The  objections  to  the  policy  on  the  part  of  the 
"  haves "  and  the  "  have  nots "  are,  of  course, 
different,  but  as  they  both  converge  to  the  same 
point,  namely,  to  the  reform  of  our  system  of  war 
finance,  it  is  possible  that  they  may  in  time  have  the 
effect  of  shaking  even  the  confidence  of  our  poli- 
ticians and  officials  in  the  haphazard  and  slipshod 
methods  which  would  long  ago  have  produced 
financial  disaster  if  it  had  not  been  for  the  great 
financial  strength  of  the  country. 

Finance  is  an  enormously  important  weapon  in 
the  hands  of  our  rulers  for  guiding  the  economic 


36  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

activities  of  the  people.  This  is  so  even  in  peace 
time  to  a  certain  extent,  though  the  revenue  then 
collected  is  so  small  an  item  in  the  total  national 
income  that  it  counts  for  much  less  than  in  war, 
when  the  power  that  the  Government  can  wield  by 
its  policy  in  taxation  and  borrowing  might  have 
been  all-powerful  in  keeping  the  nation  on  the  right 
lines  in  the  matter  of  spending  and  keeping  down 
the  cost  of  the  war,  and  in  maintaining  our  financial 
staying  power  to  a  far  greater  extent  than  has 
actually  been  done. 

It  is  easy,  as  they  say  on  the  Stock  Exchange,  to 
job  backwards,  and  it  is  also  easy,  and  perhaps 
rather  unprofitable,  to  hazard  opinions  about  what 
would  have  happened  if  things  had  been  otherwise. 
Nevertheless,  when  we  look  back  on  the  spirit  of  the 
country  as  it  was  in  those  early  days  of  the  war, 
when  the  violation  of  Belgium  had  sent  a  chivalrous 
thrill  through  the  hearts  of  all  classes  in  the  country, 
when  we  all  recognised  that  we  were  faced  with  the 
greatest  crisis  in  our  history,  that  our  country  and 
the  future  of  civilisation  were  about  to  be  tested  by 
the  severest  strain  ever  applied  to  them,  that  the 
life  and  fortune  of  the  individual  did  not  count,  but 
that  the  war  and  victory  were  the  only  interests 
that  any  one  had  a  right  to  consider — when  one 
remembers  all  these  things,  and  the  use  that  a  wise 
financial  policy  might  have  made  of  them,  it  is 
impossible  to  avoid  the  conclusion  that  the  history 
of  the  war  in  this  country  and  its  social  and  political 
effects  might  have  been  something  much  finer,  much 
cleaner  and  more  noble  if  only  the  weapons  of  finance 


THE  EARLY  FEELING  37 

had  been  more  boldly  and  wisely  used.  It  is  not  a 
good  thing  to  indulge  in  high-falutin'  on  this  subject. 
It  is  absurd  to  suppose  that  the  war  suddenly  turned 
us  all  into  plaster  saints  at  the  beginning,  and  that 
we  might  have  continued  so  to  the  end  if  the  State 
had  dealt  with  our  money  in  a  proper  way.  But 
without  setting  up  any  such  idealistic  arguments  as 
these,  looking  back  on  those  early  days  of  the  war, 
one  can  still  remember  the  thrill  of  earnestness  and 
of  eagerness  for  self-sacrifice  which  has  since  then 
given  way  lamentably  to  war  profiteering,  war 
strikes,  and  a  general  struggle  among  many  classes 
of  the  community  to  make  as  much  as  possible  out 
of  the  war,  merely  because  our  financial  leaders  have 
never  really  put  the  country's  financial  problem 
properly  before  the  country. 

We  were  not  plaster  saints,  but  we  were  either 
idealistic  and  perhaps  foolish  people  who  attached 
great  importance  to  the  freedom  and  security  of 
small  nations  and  all  those  items  in  the  programme 
of  idealistic  Radicalism,  or  else  we  were  good,  red- 
hot,  true-blue  Jingoes  with  a  hearty  hatred  for 
Germany,  and  enjoyed  the  thought  that  the  big 
fight  which  we  had  long  foreseen  between  the  two 
countries  was  at  last  going  to  be  fought  out.  Or, 
again,  we  were  just  commonplace  people  who  did 
not  much  believe  in  idealistic  Radicalism  or  anti- 
German  bitterness,  but  saw  that  the  whole  future 
of  our  country  was  at  stake,  and  were  prepared  to 
do  anything  for  it.  A  fine  example  was  set  us  in 
those  days  by  the  Trade  Union  leaders.  The 
industrial  world  was  seething  with  discontent.  The 

D 


38  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

Suffragettes  in  London  and  the  Carsonites  in  Ireland 
had  shown  us  how  much  could  be  done  by  appeals 
to  physical  force  in  a  lazy-minded  community  ;  and 
hints  of  industrial  revolution,  with  great  organised 
strikes,  which  were  going  to  tie  up  the  transport 
industry  of  the  country  were  in  the  air.  And  then, 
when  the  war  came,  the  Labour  leaders  said,  "  No 
strikesuntil  thewar  is  over.  Our  country  comes  first." 

This  was  the  lead  given  to  the  country  by  those 
down  at  the  bottom,  who  had  the  least  to  lose,  and 
whose  patriotism  during  the  course  of  the  war  has 
frequently  been  questioned.  At  the  top  the  financial 
and  property-owning  classes,  having  been  saved  by 
Mr  Lloyd  George's  able  adroitness  from  a  bad  crisis 
in  the  City,  were  entirely  tame,  and  would  have 
suffered  anything  in  the  way  of  taxation  or  financial 
conscription  if  the  need  for  it  had  been  properly  put 
before  them. 

It  is  almost  amusing  to  remember  now  that 
in  those  early  days  of  the  war  the  shareholders  in 
Home  Railway  companies  were  thought  lucky.  The 
Government  were  taking  the  railways  over,  and  were 
guaranteeing  that  their  proprietors  should  receive 
the  same  dividends  as  they  had  had  before  the  war. 
Such  was  the  view  in  financial  and  property-owning 
circles  of  results  of  war  that,  so  far  from  any  expec- 
tation of  the  huge  profits  which  war  has  put  into 
the  pockets  of  certain  classes,  they  were  only  too 
thankful  if  they  could  be  assured  that  their  gross 
incomes  were  not  going  to  be  reduced. 

Such  was  the  spirit  with  which  the  Government 
of  that  day  had  to  deal.  A  spirit  in  all  classes 


THE  ECONOMIC    PROBLEM  39 

earnestly  patriotic,  and  so  thoroughly  frightened  of 
the  economic  consequences  of  the  war  that  it  would 
have  been  ready  to  face  any  sacrifices  that  the 
Government  had  asked  of  it.  How,  then,  would  the 
Government  have  dealt  with  this  spirit  if  it  had 
taken  the  trouble  really  to  think  out  the  problem 
of  war  finance  on  a  long  view  instead  of  proceeding 
along  a  haphazard  line,  adjusting  peace  methods  to 
war  without  any  consideration  as  to  their  adequacy  ? 
If  the  problem  had  been  really  thought  out  before- 
hand the  Government  must  have  seen  clearly  that 
the  real  economic  problem  in  war-time  is  not  merely 
a  question  of  raising  money,  since  that  can  at  any 
time  be  done  easily  by  means  of  a  printing-press, 
but  of  diverting  the  industrial  energy  of  the  nation 
from  peace  to  war  purposes,  that  is  to  say,  trans- 
ferring from  the  enjoyment  of  the  individual  citizen 
the  goods  and  services  that  used  to  contribute  to 
his  comfort  and  amusement,  and  turning  them  over 
to  the  provision  of  the  things  needed  for  the  war. 
War's  needs  can  only  be  met  out  of  the  current 
production  of  the  world  as  it  is  at  present.  All  the 
warring  powers  begin  a  war  with  certain  accumulated 
war  stores  consisting  of  battleships,  ammunition, 
guns  and  all  other  forms  of  war  material.  Apart 
from  these  stores  with  which  they  begin,  the  whole 
work  of  providing  the  armies  with  the  fighting 
materials  that  they  require,  and  the  food  and  clothes 
that  they  consume,  has  to  be  done  during  the  course 
of  the  war,  that  is  to  say,  out  of  the  current  produc- 
tion of  the  moment. 

Therefore  the  real  economic  problem  that  any 


40  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

Government  has  to  face  in  war-time  is  that  of  in- 
ducing its  citizens  to  reduce  their  purchase  of  goods 
and  services,  that  is  to  say,  to  spend  less,  so  that  all 
the  things  required  for  the  Army  and  Navy  may  be 
obtained  by  the  Government.  It  is  true  that  some 
of  the  goods  and  services  required  for  carrying  on 
war  can  be  obtained  from  foreign  countries  by  any 
belligerent  which  is  able  to  communicate  with  them 
freely.  In  that  case  the  current  production  of  the 
foreigner  can  be  called  in  to  help.  But  this  can 
only  be  done  if  the  warring  country  is  able  to  ship 
goods  to  the  foreigner  in  payment  for  what  it  buys, 
or  if  it  is  able  to  obtain  a  loan  from  the  foreigner, 
or  some  other  foreign  country,  in  order  to  pay  for  its 
purchases  abroad,  or  again,  if,  as  in  our  case,  it  holds 
a  large  accumulation  of  securities  which  foreign 
countries  are  prepared  to  take  in  exchange  for  goods 
that  they  send  for  the  purposes  of  the  war.  By 
these  two  last-named  processes,  raising  money 
abroad,  and  selling  securities  to  foreign  nations,  the 
warring  country  impoverishes  itself  for  the  future. 
When  it  borrows  abroad  it  pledges  itself  to  export 
goods  and  services  in  future  to  meet  interest  and 
sinking  fund  on  the  money  so  raised,  so  getting  no 
goods  and  services  in  return.  When  it  ships  its 
accumulated  wealth  in  the  form  of  securities  it  gives 
up  for  the  future  any  claim  to  goods  and  services 
from  the  debtor  country  which  used  to  come  to  it 
to  meet  interest  and  redemption.  It  is  only  by 
shipping  goods  in  return  for  goods  imported  for  the 
war  that  a  country  can  keep  its  financial  staying- 
power  on  an  even  keel. 


THE    ECONOMIC   PROBLEM  41 

Thus  the  problem  which  a  statesman  who  had 
thought  out  the  economics  of  war  beforehand  would 
have  recognised  as  the  keystone  of  his  policy,  would 
have  been  that  of  diverting  the  activities  of  the 
country  from  providing  itself  with  comforts  and 
amusements  to  turning  out  goods  required  for  war, 
and  of  doing  so  with  the  least  possible  friction,  the 
least  possible  alteration  in  the  economic  equilibrium 
of  the  country,  and,  above  all,  with  the  least  possible 
cost  to  the  national  finances.  We  arrive  at  the  true 
aspect  of  this  problem  more  easily  if  we  leave  out 
the  question  of  money  altogether  and  think  of  it 
in  units  of  energy.  When  a  nation  goes  to  war  it 
means  to  say  that  it  has  to  apply  so  many  units  of 
energy  to  the  business  of  fighting,  and  to  provide 
the  fighters  with  all  that  they  need.  If  at  the 
beginning  of  the  war  its  utmost  capacity  of  output 
was,  to  mention  merely  a  fanciful  figure,  a  thousand 
million  units  of  energy,  and  if  it  was  clear  that  the 
fighting  forces  of  the  country  would  need  for  their 
proper  maintenance  five  hundred  million  units  of 
energy,  then  it  is  clear  that  the  nation's  ordinary 
consumption  of  goods  and  services  would  have  to  be 
reduced  to  the  extent  of  five  hundred  millions  of  units 
of  energy,  which  would  have  to  be  applied  to  the 
war,  that  is,  assuming  that  its  possible  output 
remained  the  same. 

In  other  words,  the  spending  power  of  the 
citizens  of  the  country  had  to  be  reduced  so  that  the 
industrial  energy  that  used  to  go  into  meeting  their 
wants  might  be  made  available  for  the  purposes  of 
the  fighting  forces.  Now  what  was  the  straightest, 


42  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

simplest  and  cleanest  way  of  bringing  about  this 
reduction  in  buying  power  on  the  part  of  the  ordinary 
citizen  which  has  been  shown  to  be  necessary  for  the 
purposes  of  war  finance  ?  Clearly  the  best  way  of 
doing  it  is  by  taxation  equitably  imposed.  When 
the  State  taxes,  it  says  in  effect  to  the  citizens, 
"  Your  country  needs  certain  goods  and  services, 
you  therefore  will  have  to  go  without  those  goods 
and  services,  and  the  simplest  way  to  make  you  do 
this  is  to  take  away  your  money  and  so  ration  your 
buying  power.  Whatever  is  needed  for  the  Army 
and  Navy  will  be  taken  away  from  you  by  taxation, 
and  the  result  of  this  will  be  that,  instead  of  your 
indulging  in  comforts  and  luxuries,  to  the  extent 
of  the  war's  needs  the  Government  will  use  your 
money  for  paying  for  what  is  needed  for  the  Army 
and  Navy." 

If  such  a  policy  had  been  carried  out  the  cost  of 
the  war  to  the  community  would  have  been  enor- 
mously cheapened.  There  need  have  been  no  general 
rise  in  prices  because  there  would  have  been  no 
increase  in  demand  for  goods  and  services.  Any- 
thing that  the  Government  spent  would  have  been 
counter-balanced  by  decreased  spending  by  the 
individual ;  any  work  that  the  Government  needed 
for  the  war  would  have  been  counter-balanced  by  a 
reduction  in  demand  for  work  on  the  part  of  in- 
dividual citizens.  There  would  have  been  no 
multiplication  of  currency  owing  to  enormous  credits 
raised  by  the  Government ;  there  would  have  been 
merely  a  transfer  of  buying  power  from  individuals 
to  the  State.  The  process  would  have  been  gradual, 


THE   EFFECTS   OF  TAXATION          43 

there  need  have  been  no  acute  dislocation,  but  as 
the  cost  of  the  war  increased,  that  is  to  say,  as  the 
Government  needed  more  and  more  goods  and  ser- 
vices for  its  prosecution,  the  community  would 
gradually  have  shed  one  after  another  the  extra- 
vagances on  which  it  spent  so  many  hundreds  of 
millions  in  days  before  the  war.  As  it  shed  these 
extravagances  the  labour  and  energy  needed  to 
produce  them  would  have  been  automatically  trans- 
ferred to  the  service  of  the  war,  or  to  the  production 
of  necessaries  of  life.  By  this  simple  process  of 
monetary  rationing  all  the  frantic  appeals  for 
economy,  and  most  of  the  complicated,  tangled 
problems  raised  by  such  matters  as  Food  Control  or 
National  Service  would  have  been  avoided. 

But,  it  may  be  contended,  this  is  setting  up  an 
ideal  so  absurdly  too  high  that  you  cannot  expect 
any  modern  nation  to  rise  up  to  it.  Perhaps  this  is 
true,  though  I  am  not  at  all  sure  that  if  we  had  had 
a  really  bold  and  far-sighted  Finance  Minister  at  the 
beginning  of  the  war  he  might  not  have  persuaded 
the  nation  to  tackle  its  war  problem  on  this  exalted 
line.  At  least  it  can  be  claimed  that  our  financial 
rulers  might  have  looked  into  the  history  of  the 
matter  and  seen  what  our  ancestors  had  done  in  big 
wars  in  this  matter  of  paying  for  war  costs  out  of 
taxation,  with  the  determination  to  do  at  least  as 
well  as  they  did,  and  perhaps  rather  better,  owing 
to  the  overwhelming  scale  of  modern  financial 
problems.  If  they  had  done  so  they  would  have 
found  that  both  in  the  Napoleonic  and  the  Crimean 
wars  we  paid  for  nearly  half  the  cost  of  the  war  out 


44  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

of  revenue  as  they  went  on,  whereas  in  the  present 
war  the  proportion  that  we  are  paying  by  taxation, 
instead  of  being  47  per  cent.,  as  it  was  when  our 
sturdy  ancestors  fought  against  Napoleon,  is  less 
than  20  per  cent.*  Why  has  this  been  so  ?  Partly, 
no  doubt,  owing  to  the  slackness  and  cowardice  of 
our  politicians,  and  the  apathy  of  the  overworked 
officials,  who  have  been  too  busy  with  the  details  of 
finance  to  think  the  problem  out  on  a  large  scale. 
But  it  is  chiefly,  I  think,  because  our  system  of 
taxation,  though  probably  the  best  in  the  world, 
involves  so  mafny  inequities  that  it  cannot  be  applied 
on  a  really  large  scale  without  producing  a  discontent 
which  might  have  had  serious  consequences  on  our 
conduct  of  the  war. 

It  is  not  possible  nowadays,  now  that  the  working 
classes  are  conscious  of  their  strength,  to  apply 
taxation  to  ordinary  articles  of  general  consump- 
tion with  anything  like  the  ruthlessness  which  in 
former  days  produced  such  widespread  misery.  In- 
direct taxation  of  this  kind  carries  with  it  this 
inherent  weakness  that  its  burden  falls  most  heavily 
on  those  who  are  least  able  to  bear  it,  consequently 
it  is  bound  to  break  in  the  hand  of  those  who 
attempt  to  apply  it  with  anything  like  vigour  to  a 
community  which  is  prepared  to  stand  up  for  fair 
treatment.  A  tax  on  bread  or  salt  obviously  hits 
the  wage-earner  at  305.  a  week  infinitely  harder  than 
it  hits  the  millionaire,  and  so  the  country  would  not 
tolerate  taxes  on  bread  or  salt.  Direct  taxes,  such 

*  See  Economist,  August  4,  1917,  p,  151. 


INCOME   TAX   INEQUITIES  45 

as  Income  Tax  and  Death  Duties,  have  this  enormous 
advantage,  that  they  can  really  be  regulated  so  as  to 
press  with  continually  increasing  severity  upon  those 
who  are  best  able  to  bear  them.  Unfortunately  our 
Income  Tax  is  still  so  unjustly  imposed  that  it  was 
clearly  impossible  to  make  full  use  of  it  without  its 
being  first  reformed.  That  two  men,  each  earning 
£1000  a  year,  should  pay  the  same  Income  Tax,  in 
spite  of  one  having  a  wife  and  five  children,  while 
the  other  is  a  careless  bachelor,  is  such  a  blot  upon 
this  otherwise  excellent  tax  that  it  is  generally 
agreed  that  the  present  rate  of  55.  is  as  high  as  it  can 
be  made  to  go  unless  some  reform  is  introduced  into 
its  incidence.  The  need  for  its  reform  is  made  the 
excuse  for  a  sparing  use  of  the  tax,  and  we  have 
been  on  several  occasions  assured  that,  as  soon  as 
the  war  is  over,  this  reform  will  be  set  about. 

In  the  meantime  the  Government  falls  back  on 
finding  about  80  per  cent,  of  its  requirements  of  the 
war  on  a  system  of  borrowing.  In  so  far  as  the 
money  subscribed  to  its  loans  is  money  that  is  being 
genuinely  saved  by  investors  this  process  has  exactly 
the  same  effect  as  taxation,  that  is  to  say,  somebody 
goes  without  goods  and  services  and  hands  over  his 
power  to  buy  them  to  the  State  to  be  used  for  the 
war.  Borrowing  of  this  kind  consequently  does 
everything  that  is  needed  for  the  solution  of  the 
immediate  war  problem,  and  the  only  objection  to 
it  is  that  it  leaves  later  on  the  difficulties  involved  by 
raising  taxes  when  the  war  is  over,  and  economic 
problems  are  much  more  complicated  in  times  of 
peace  than  in  war,  for  meeting  the  interest  and 


46  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

redemption  of  debt.  But,  in  fact,  it  is  well  known 
that  by  no  means  all  that  the  Government  has 
borrowed  for  war  purposes  has  been  provided  in  this 
way.  Much  of  the  money  that  the  Government  has 
obtained  for  war  purposes  has  been  got  not  out  of 
genuine  savings  of  investors,  but  by  arrangements 
of  various  kinds  with  the  banking  machinery  of  the 
country,  or  by  the  simple  use  of  the  printing-press, 
with  the  result  that  the  Government  has  provided 
itself  with  an  enormous  mass  of  new  currency  which 
has  not  been  taken  out  of  anybody  else's  pocket,  but 
has  been  manufactured  by  or  for  the  Government. 

The  consequence  of  the  profligate  use  of  this 
dishonest  process  is  that  general  rise  in  prices,  which 
is  in  effect  an  indirect  tax  on  the  necessaries  of  life, 
involving  all  the  injustice  and  ill-feeling  which  arises 
from  such  a  measure.  It  is  inevitable  that  the 
working  classes,  finding  themselves  subjected  to  a 
rise  in  prices,  the  cause  of  which  they  do  not  under- 
stand, but  the  result  of  which  they  see  to  be  a  great 
decrease  in  the  buying  power  of  their  wages,  should 
believe  that  they  are  being  exploited  by  profiteers, 
that  the  rich  classes  are  growing  richer  at  their 
expense  out  of  the  war,  and  that  they  and  the 
country  are  being  bled  by  a  set  of  unpatriotic 
capitalist  blood-suckers.  It  is  also  natural  that  the 
property-owning  classes,  who  find  themselves  paying 
an  Income  Tax  which  they  regard  as  extortionate, 
should  consider  that  the  working  classes  by  their 
continuous  demands  for  higher  wages  to  meet  higher 
cost  of  living,  are  trying  to  exploit  the  country  in 
their  own  interests  in  a  time  of  national  crisis,  and 


EFFECTS   OF    INFLATION  47 

displaying  a  most  unedifying  spirit.  The  social 
result  of  this  evil  policy  of  inflation,  in  embittering 
class  against  class,  is  a  matter  which  it  is  difficult  to 
exaggerate.  Some  people  think  that  it  was  in- 
evitable. This  is  too  wide  a  question  to  be  entered 
into  now,  but  at  least  it  must  be  contended  that  if 
it  is  inevitable  the  extent  to  which  it  is  being  practised 
might  have  been  very  greatly  diminished. 

Do  we  mean  to  go  on  to  the  end  of  the  war  with 
this  muddling  policy  of  bad  finance  ?  If  we  still 
insist  on  believing  that  the  war  cannot  last  another 
six  months,  and  there  is  therefore  no  need  to  pull 
ourselves  up  short  financially  and  put  things  in 
order,  then  we  certainly  shall  do  so.  But  we  should 
surely  recognise  that  there  is  at  least  a  chance  that 
the  war  may  go  on  for  years,  that  if  so  our  present 
financial  methods  will  leave  us  with  a  burden  of 
debt  which  is  appalling  to  consider,  and  that  in  any 
case,  whether  the  war  lasts  another  six  months  or 
another  six  years,  a  reform  of  our  financial  methods 
is  long  overdue,  is  inevitable  some  time,  and  will  pay 
us  better  the  sooner  it  is  set  about. 


IV 

WAR   FINANCE  AS  IT   MIGHT    HAVE 
BEEN— II 

December,  1917 

The  Changed  Spirit  of  the  Country — A  Great  Opportunity 
thrown  away — What  Taxation  might  have  done — The 
Perils  of  Inflation — Drifting  stupidly  along  the  Line  of 
Least  Resistance — It  is  we  who  pay,  not  "  Posterity." 

IN  the  November  number  of  Sperling's  Journal  I 
dealt  with  the  question  of  how  our  war  finance  might 
have  been  improved  if  a  longer  view  had  been  taken 
from  the  beginning  concerning  the  length  of  the  war 
and  the  measures  that  would  be  necessary  for  raising 
the  money.  The  subject  was  too  big  to  be  fully 
covered  in  the  course  of  one  article,  and  I  have  been 
given  this  opportunity  of  continuing  its  examination. 
Before  doing  so  I  wish  to  remind  my  readers  once 
more  of  the  great  difference  in  the  spirit  of  the 
country  with  regard  to  financial  self-sacrifice  in  the 
early  days  of  the  war  and  at  the  present  time,  after 
three  years  of  high  profits,  public  and  private 
extravagance,  and  successful  demands  for  higher 
wages  have  demoralised  the  public  temper  into  a 
belief  that  war  is  a  time  for  making  big  profits  and 
earning  big  wages  at  the  expense  of  the  community. 
In  the  early  days  the  spirit  of  the  country  was  very 


"NO    PRICE   TOO  HIGH"  49 

different,  and  it  might  have  remained  so  if  it  had 
been  trained  by  the  use  made  of  public  finance  along 
the  right  line.  In  the  early  days  the  Labour  leaders 
announced  that  there  were  to  be  no  strikes  during 
the  war,  and  the  property-owning  classes,  with  their 
hearts  full  of  gratitude  for  the  promptitude  with 
which  Mr  Lloyd  George  had  met  the  early  war 
crisis,  were  ready  to  do  anything  that  the  country 
asked  from  them  in  the  matter  of  monetary  sacrifice. 
Mr  Asquith's  grandiloquent  phrase,  "  No  price  is 
too  high  when  Honour  is  at  stake,"  might  then  have 
been  taken  literally  by  all  classes  of  the  community 
as  a  call  to  them  to  do  their  financial  duty.  Now  it 
has  been  largely  translated  into  a  belief  that  no 
price  is  too  high  to  exact  from  the  Government  by 
those  who  have  goods  to  sell  to  it,  or  work  to  place 
at  its  disposal.  In  considering  what  might  have 
been  in  matters  of  finance  we  have  to  be  very  careful 
to  remember  this  evil  change  which  has  taken  place 
in  the  public  spirit  owing  to  the  short-sighted  financial 
measures  which  have  been  taken  by  our  rulers. 

Thus,  when  we  consider  how  our  war  finance 
might  have  been  improved,  we  imply  all  along  that 
the  improvements  suggested  should  have  been  begun 
when  the  war  was  in  its  early  stages,  and  when  public 
opinion  was  still  ready  to  do  its  duty  in  finance. 
The  conclusion  at  which  we  arrived  a  month  ago  was 
that  by  taxation  rather  than  by  borrowing  and 
inflation  much  more  satisfactory  results  could  have 
been  got  out  of  the  country.  If,  instead  of  manu- 
facturing currency  for  the  prosecution  of  the  war, 
the  Government  had  taken  money  from  the  citizens 


50  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

either  by  taxation  or  by  loans  raised  exclusively  out 
of  real  savings,  the  rise  in  prices  which  has  made  the 
war  so  terribly  costly,  and  has  raised  so  great  a 
danger  through  the  unrest  and  dissatisfaction  of  the 
working  classes,  might  have  been  to  a  great  extent 
avoided,  and  the  higher  the  rate  of  taxation  had 
been,  and  the  less  the  amount  provided  by  loans,  the 
less  would  have  been  the  seriousness  of  the  problem 
that  now  awaits  us  when  the  war  is  over  and  we 
have  to  face  the  question  of  the  redemption  of  the 
debt. 

In  this  matter  of  taxation  we  have  certainly  done 
much  more  than  any  of  the  countries  who  are 
fighting  either  with  us  or  against  us.  Germany  set 
the  example  at  the  beginning  of  the  war  of  raising 
no  money  at  all  by  taxation,  puffed  up  with  the  vain 
belief  that  the  cost  of  the  war,  and  a  good  deal  more, 
was  going  to  be  handed  over  to  her  in  the  shape  of 
indemnities  by  her  vanquished  enemies.  This 
terrible  miscalculation  on  her  part  led  her  to  set  a 
very  bad  example  to  the  warring  Powers,  and  when 
protests  are  made  in  this  country  concerning  the  low 
proportion  of  the  war's  costs  that  is  being  met  out 
of  taxation  it  is  easy  for  the  official  apologist  to 
answer,  "  See  how  much  more  we  are  doing  than 
Germany."  It  is  easy,  but  it  is  not  a  good  answer. 
Germany  had  no  financial  prestige  to  maintain  ;  the 
money  that  Germany  is  raising  for  financing  the  war 
is  raised  almost  entirely  at  home,  and  she  rejoices 
in  a  population  so  entirely  tame  under  a  dominant 
caste  that  it  would  very  likely  be  quite  easy  for  her, 
when  the  war  is  over,  to  cancel  a  large  part  of  the 


THE   GERMAN   EXAMPLE  51 

debt  by  some  process  of  financial  jugglery,  and  to 
induce  her  tame  and  deluded  creditors  to  believe 
that  they  have  been  quite  handsomely  treated. 

Here,  however,  in  England,  we  have  a  financial 
prestige  which  is  based  upon  financial  leadership  of 
more  than  a  century.  We  have  also  raised  a  large 
part  of  the  money  we  have  used  for  the  prosecution 
of  the  war  by  borrowing  abroad,  and  so  we  have  to 
be  specially  careful  in  husbanding  that  credit,  which 
is  so  strong  a  weapon  on  the  side  of  liberty  and 
justice.  And,  further,  we  have  a  public  which  thinks 
for  itself,  and  will  be  highly  sceptical,  and  is  already 
inclined  to  be  sceptical,  concerning  the  manner  in 
which  the  Government  may  treat  the  national 
creditors.  Its  tendency  to  think  for  itself  in  matters 
of  finance  is  accompanied  by  very  gross  ignorance, 
which  very  often  induces  it  to  think  quite  wrongly ; 
and  when  we  find  it  necessary  for  the  Chancellor  of 
the  Exchequer  to  make  it  clear  at  a  succession  of 
public  meetings  that  those  who  subscribe  to  War 
Loans  need  have  no  fear  that  their  property  in  them 
will  be  treated  worse  than  any  other  kinds  of  property, 
we  see  what  evil  results  the  process  of  too  much 
borrowing  and  too  little  taxation  can  have  in  a  com- 
munity which  is  acutely  suspicious  and  distrustful  of 
its  Government,  and  very  liable  to  ignorant  blunder- 
ing on  financial  subjects. 

What,  then,  might  have  been  done  if,  at  the 
beginning  of  the  war,  a  really  courageous  Govern- 
ment, with  some  power  of  foreseeing  the  needs  of 
finance  for  several  years  ahead  if  the  war  lasted, 
had  made  a  right  appeal  to  a  people  which  was  at 


52  WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

that  time  ready  to  do  all  that  was  asked  from  it  for 
the  cause  of  justice  against  the  common  foe  ?  The 
problem  by  which  the  Government  was  faced  was 
this,  that  it  had  to  acquire  for  the  war  an  enormous 
and  growing  amount  of  goods  and  services  required 
by  our  fighting  forces,  some  of  which  could  only  be 
got  from  abroad,  and  some  could  only  be  produced 
at  home,  while  at  the  same  time  it  had  to  maintain 
the  civilian  population  with  such  a  supply  of  the 
necessaries  of  life  as  would  maintain  them  in 
efficiency  for  doing  the  work  at  home  which  was 
required  to  support  the  effort  of  our  fighters  at  the 
Front.  With  regard  to  the  goods  which  came  from 
abroad,  either  for  war  purposes  or  for  the  main- 
tenance of  the  civilian  population,  the  Government 
obviously  had  no  choice  about  the  manner  in  which 
payment  had  to  be  made.  It  had  no  power  to  tax 
the  suppliers  in  foreign  countries  of  the  goods  and 
services  that  we  needed  during  the  war  period.  It 
consequently  could  only  induce  them  to  supply  these 
goods  and  services  by  selling  them  either  com- 
modities produced  by  our  own  industry,  or  securities 
held  by  our  capitalists,  or  its  own  promises  to  pay. 

With  regard  to  the  goods  that  we  might  have 
available  for  export,  these  were  likely  to  be  curtailed 
owing  to  the  diversion  of  a  large  number  of  our 
industrial  population  into  the  ranks  of  the  Army 
and  into  munition  factories.  This  curtailment,  on 
the  other  hand,  might  to  a  certain  extent  be  made 
good  by  a  reduction  in  consumption  on  the  part  of 
the  civilian  population,  so  setting  free  a  larger  pro- 
portion of  our  manufacturing  energy  for  the  pro- 


OUR   WAR   COST   RAISED   AT   HOME     53 

duct  ion  of  goods  for  export.  Otherwise  the  problem 
of  paying  for  goods  purchased  from  abroad  could 
only  be  solved  by  the  export  of  securities,  and  by 
borrowing  from  foreign  countries,  so  that  the  shells 
and  other  war  material  that  were  required,  for 
example,  from  America,  might  be  paid  for  by 
American  investors  in  consideration  of  receiving 
from  us  a  promise  to  pay  them  back  some  day,  and 
to  pay  them  interest  in  the  meantime.  In  other 
words,  we  could  only  pay  for  what  we  needed  from 
abroad  by  shipping  goods  or  securities.  As  is  well 
known,  we  have  financed  the  war  by  these  methods 
to  an  enormous  extent ;  the  actual  extent  to  which 
we  have  done  so  is  not  known,  but  it  is  believed 
that  we  have  roughly  balanced  by  this  process 
the  sums  that  we  have  lent  to  our  Allies  and 
Dominions,  which  now  amount  to  well  over  1300 
millions. 

If  this  is  so,  we  have,  in  fact,  financed  the  whole  of 
the  real  cost  of  the  war  to  ourselves  at  home,  and 
we  have  done  so  by  taxation,  by  borrowing  saved 
money,  and  by  inflation — that  is  to  say,  by  the  manu- 
facture of  new  currency,  with  the  inevitable  result 
of  depreciating  the  buying  power  of  our  existing 
currency  as  a  whole.  How  much  better  could  the 
thing  have  been  done  ?  In  other  words,  how  much 
of  the  war's  cost  in  so  far  as  it  was  raised  at  home 
could  have  been  raised  by  taxation  ?  In  theory  the 
answer  is  very  simple,  for  in  theory  the  whole  cost 
of  the  war,  in  so  far  as  it  is  raised  at  home,  could  have 
been  raised  by  taxation  if  it  could  have  been  raised 
at  all.  It  is  not  possible  to  raise  more  by  any  other 

B 


54    WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

method  than  it  is  theoretically  possible  to  raise  by 
taxation.  It  is  often  said,  "  All  this  preaching  about 
taxation  is  all  very  well,  but  you  couldn't  possibly 
get  anything  like  the  amount  that  is  needed  for  the 
war  by  taxation,  or  even  by  borrowing  of  saved 
money.  This  inflation  against  which  economic 
theorists  are  continually  railing  is  inevitable  in  time 
of  war  because  there  isn't  enough  money  in  the 
country  to  provide  all  that  is  needed." 

This  argument  is  simply  the  embodiment  of  the 
old  delusion,  so  common  among  people  who  handle 
the  machinery  of  finance,  that  you  can  really  increase 
the  supply  of  necessary  goods  by  increasing  the 
supply  of  money,  which  is  nothing  else  than  claims 
to  goods  expressed  either  in  pieces  of  metal  or  pieces 
of  paper.  As  we  have  seen,  all  that  we  have  been 
able  to  raise  abroad  has  been  required  for  advances 
to  our  Allies  and  Dominions,  consequently  we  have 
had  to  fall  back  upon  our  own  home  production  for 
everything  needed  for  our  own  war  costs.  Either 
we  have  turned  out  the  goods  at  home  or  we  have 
turned  out  goods  to  sell  to  foreigners  in  exchange  for 
goods  that  we  require  from  them.  But  since  we 
thus  had  to  rely  on  home  production  for  the  whole 
of  the  war's  needs  as  far  as  we  were  concerned,  it  is 
clear  that  the  Government  could,  if  it  had  been 
gifted  with  ideal  courage  and  devotion,  and  if  it  had 
a  people  behind  it  ready  to  do  all  that  was  needed 
for  victory,  have  taken  the  whole  of  the  home  pro- 
duction, except  what  was  wanted  for  maintaining 
the  civilian  population  in  efficiency,  for  the  purposes 
of  the  war. 


COMMANDEERING   BUYING   POWER     55 

It  is  a  commonplace  of  political  theory  that  the 
Government  has  a  right  to  take  the  whole  of  the 
property  and  the  whole  of  the  labour  of  its  citizens. 
But  it  would  not,  of  course,  have  been  possible  for 
the  Government  immediately  to  inaugurate  a  policy 
of  setting  everybody  to  work  on  things  required  for 
the  war  and  paying  them  all  a  maintenance  wage. 
This  might  have  been  done  in  theory,  but  in  practice 
it  would  have  involved  questions  of  industrial  con- 
scription, which  would  probably  have  raised  a  storm 
of  difficulty.  What  the  Government  might  have 
done  would  have  been  by  commandeering  the  buying 
power  of  the  citizen  to  have  set  free  the  whole 
industrial  energy  of  the  community  for  supplying 
the  war's  needs  and  the  necessaries  of  life.  At 
present  the  national  output,  which  is  only  another 
way  of  expressing  the  national  income,  is  produced 
from  certain  channels  of  production  in  response  to 
the  expectation  of  demand  from  those  whose  pos- 
session of  claims  to  goods,  that  is  to  say,  money, 
gives  them  the  right  to  say  what  kind  of  goods  they 
will  consume,  and  consequently  the  industrial  part 
of  the  population  will  produce. 

Had  the  Government  laid  down  that  the  whole 
cost  of  the  war  was  to  be  borne  by  taxation,  the 
effect  of  this  measure  would  have  been  that  every- 
thing which  was  needed  for  the  war  would  have  been 
placed  at  the  disposal  of  the  Government  by  a 
reduction  in  spending  on  the  part  of  those  who  have 
the  spending  power.  In  other  words,  the  only  pro- 
cess required  would  have  been  the  readjustment  of 
industrial  output  from  the  production  of  goods 


56    WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

needed  (or  thought  to  be  needed)  for  ordinary 
individuals  to  those  required  for  war  purposes. 
This  readjustment  would  have  gone  on  gradually  as 
the  war's  cost  increased.  There  would  have  been 
no  competition  between  the  Government  and  private 
individuals  for  a  limited  amount  of  goods  in  a 
restricted  market,  which  has  had  such  a  disastrous 
effect  on  prices  during  the  course  of  the  war  ;  there 
would  have  been  no  manufacture  of  new  currency, 
which  means  the  creation  of  new  buying  power  at  a 
time  when  there  are  less  goods  to  buy,  which  has  had 
an  equally  fatal  effect  on  prices  ;  there  would  have 
had  to  be  a  very  drastic  reform  in  our  system  of 
taxation,  by  which  the  income  tax,  the  only  really 
equitable  engine  by  which  the  Government  can  get 
much  money  out  of  us,  would  have  been  reformed  so 
as  to  have  borne  less  hardly  upon  those  with  families 
to  bring  up. 

Mr  Sidney  Webb  and  the  Fabians  have  advocated 
a  system  b}^  which  the  basis  of  assessment  for  income 
tax  should  be  the  income  divided  by  the  number  of 
members  of  a  family,  rather  than  the  mere  income 
without  any  consideration  for  the  number  of  people 
that  have  to  be  provided  for  out  of  it.  With  some 
such  scheme  as  this  adopted  there  is  no  reason  why 
the  Government  should  not  have  taken,  for  example, 
the  whole  of  all  incomes  above  £1000  a  year  for  each 
individual,  due  allowance  being  made  for  obligations, 
such  as  rent,  which  involve  long  contracts.  For  any 
single*  individual  to  want  to  spend  more  than  £1000 
a  year  on  himself  or  herself  at  such  a  crisis  would 
have  been  recognised,  in  the  early  days  of  the  war, 


TAKING   THE   MONEY  57 

as  an  absurdity  ;  any  surplus  above  that  line  might 
readily  have  been  handed  over  to  the  Government, 
half  of  it  perhaps  in  taxation  and  the  other  half  in 
the  form  of  a  forced  loan. 

So  sweeping  a  change  would  not  have  been 
necessary  at  first,  perhaps  not  at  all,  because  the 
war's  cost  would  not  have  grown  nearly  so  rapidly. 
All  surplus  income  above  a  certain  line  would  have 
been  taken  for  the  time  being,  but  with  the  promise 
to  repay  half  the  amount  taken,  so  that  it  should  not 
be  made  a  disadvantage  to  be  rich,  and  no  discourage- 
ment to  accumulation  would  have  been  brought 
about.  By  this  means  the  whole  of  the  nation's 
buying  power  among  the  richer  classes  would  have 
been  concentrated  upon  the  war,  with  the  result  that 
the  private  extravagance,  which  is  still  disgracing 
us  in  the  fourth  year  of  the  war,  would  not  have 
been  allowed  to  produce  its  evil  effects.  With  the 
rich  thus  drastically  taxed,  the  working  classes  would 
have  been  much  less  restive  under  the  application 
of  income  tax  to  their  own  wages.  We  should  have 
a  much  more  freely  supplied  labour  market,  and 
since  the  rise  in  prices  would  not  have  been  nearly 
so  severe,  labour's  claim  to  higher  wages  would  have 
been  much  less  equitable,  and  labour's  power  to 
enforce  the  claim  would  have  been  much  less 
irresistible. 

What  the  Government  has  actually  done  has  been 
to  do  a  little  bit  of  taxation,  much  more  than  any- 
body else,  but  still  a  little  bit  when  compared  with 
the  total  cost  of  the  war  ;  a  great  deal  of  borrowing, 
and  a  great  deal  of  inflation.  By  this  last-named 


58    WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

method  it  produces  the  result  required,  that  of 
diverting  to  itself  a  large  part  of  the  industrial  out- 
put of  the  country,  by  the  very  worst  possible  means. 
It  still,  by  its  failure  to  tax,  leaves  buying  power  in 
the  hands  of  a  large  number  of  people  who  see  no 
reason  why  they  should  not  live  very  much  as  usual ; 
that  is  to  say,  why  they  should  not  demand  for  their 
own  purposes  a  proportion  of  the  nation's  energy 
which  they  have  no  real  right  to  require  at  such  a 
time  of  crisis.  But  in  order  to  check  their  demands, 
and  to  provide  its  own  needs,  the  Government,  by 
setting  the  bankers  to  work  to  provide  it  with  book 
credits,  gives  itself  an  enormous  amount  of  new 
buying  power  with  which,  by  the  process  of  com- 
petition, it  secures  for  itself  what  is  needed  for  the 
war.  There  is  thus  throughout  the  country  this 
unwholesome  process  of  competition  between  the 
Government  on  one  hand  and  unpatriotic  spenders  on 
the  other,  who,  between  them,  put  up  prices  against 
the  Government  and  against  all  those  unfortunate, 
defenceless  people  who,  being  in  possession  of  fixed 
salaries,  or  of  fixed  incomes,  have  no  remedy  against 
rising  prices  and  rising  taxation.  All  that  could 
possibly  have  been  spent  on  the  war  in  this  country 
was  the  total  income  of  the  people,  less  what  was 
required  for  maintaining  the  people  in  health  and 
efficiency.  That  total  income  Government  might, 
in  theory,  have  taken.  If  it  had  done  so  it  could  and 
would  have  paid  for  the  whole  of  the  war  out  of 
taxation. 

All  this,  I  shall  be  told,  is  much  too  theoretical 
and  idealistic ;    these  things  could  not  have  been 


HOW  FAR   PRACTICABLE?  59 

done  in  practice.  Perhaps  not,  though  it  is  by  no 
means  certain,  when  we  look  back  on  the  very 
different  temper  that  ruled  in  the  country  in  the 
early  months  of  the  war.  If  anything  of  the  kind 
could  have  been  done  it  would  certainly  have  been 
a  practical  proof  of  determination  for  the  war  which 
would  have  shown  more  clearly  than  anything  else 
that  "  no  price  was  too  high  when  Honour  was  at 
stake/'  It  would  also  have  been  an  extraordinary 
demonstration  to  the  working  classes  of  the  sacri- 
fices that  property  owners  were  ready  to  make,  the 
result  of  which  might  have  been  that  the  fine  spirit 
shown  at  the  beginning  of  the  war  might  have  been 
maintained  until  the  end,  instead  of  degenerating 
into  a  series  of  demands  for  higher  wages,  each  one 
of  which,  as  conceded  to  one  set  of  workmen,  only 
stimulates  another  to  demand  the  same.  But  even 
if  we  grant  that  it  is  only  theoretically  possible  to 
have  performed  such  a  feat  as  is  outlined  above, 
there  is  surely  no  question  that  much  more  might 
have  been  done  than  has  been  done  in  the  matter 
of  paying  for  the  war  by  taxation.  If  we  are  re- 
minded once  more  that  our  ancestors  paid  nearly 
half  the  cost  of  the  Napoleonic  war  out  of  revenue, 
while  we  are  paying  about  a  fifth  of  the  cost  of  the 
present  war  from  the  same  source,  it  is  easy  to  see 
that  a  much  greater  effort  might  have  been  made 
in  view  of  the  very  much  greater  wealth  of  the 
country  at  the  present  time.  I  was  going  to  have 
added,  in  view  also  of  its  greater  economic  en- 
lightenment, but  I  feel  that  after  the  experience 
of  the  present  war,  and  its  financing  by  currency 


60    WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

debasement,  the  less  about  economic  enlightenment 
the  better. 

What,  then,  stood  in  the  way  of  measures  of 
finance  which  would  have  obviously  had  results  so 
much  more  desirable  than  those  which  will  face  us 
at  the  end  of  the  war  ?     As  it  is,  the  nation,  with  all 
classes  embittered  owing  to  suspicions  of  profiteering 
on  the  part  of  the  employers  and  of  unpatriotic 
strikes  on  the  part  of  the  workers,  will  have  to  face 
a  load  of  debt,  the  service  of  which  is  already  roughly 
equivalent  to  our  total  pre-war  revenue  ;  while  there 
seems  every  prospect  that  the  war  may  continue  for 
many  half-years  yet,  and  every  half-year,  as  it  is 
at  present  financed,  leaves  us  with  a  load  of  debt 
which  will  require  the  total  yield  of  the  income  tax 
and  the  super-tax  before  the  war  to  meet  the  charge 
upon  it.    Why  have  we  allowed  our  present  finance  to 
go  so  wrong  ?     In  the  first  place,  perhaps,  we  may 
put  the  bad  example  of  Germany.     Then,  surely,  our 
rulers  might  have  known  better  than  to  have  been 
deluded  by  such  an  example.     In  the  second  place, 
it  was  the  cowardice  of  the  politicians,  who  had  not 
the  sense  in  the  early  days  of  the  war  to  see  how  eager 
the  spirit  of  the  country  was  to  do  all  that  the  war 
required  of  it,  and  consequently  were  afraid  to  tax 
at  a  time  when  higher  taxation  would  have  been 
submitted  to  most  cheerfully  by  the  country.   There 
was    also   the    absurd   weakness    of   our   Finance 
Ministers  and  our  leading  financial  officials,  which 
allowed  our  financial  machinery  to  be   so   much 
weakened  by  the  demands  of  the  War  Office  for 
enlistment  that  it  has  been  said  in  the  House  of 


TAKING    SHORT   VIEWS  61 

Commons  by  several  Chancellors  of  the  Exchequer 
that  it  is  quite  impossible  to  consider  any  form  of 
new  taxation  because  the  machinery  could  not 
undertake  it.  There  has  also  been  great  short- 
sightedness on  the  part  of  the  business  men  of  the 
country,  who  have  failed  to  give  the  Government  a 
lead  in  this  important  matter.  Like  the  Govern- 
ment, they  have  taken  short  views,  always  hoping 
that  the  war  might  soon  be  over,  and  so  have  left 
the  country  with  a  problem  that  grows  steadily 
more  serious  with  each  half-year  as  we  drift  stupidly 
along  the  line  of  least  resistance. 

Such  war  finance  as  I  have  outlined — drastic  and 
impracticable  as  it  seems — would  have  paid  us. 
Taxation  in  war-time,  when  industry's  problem  is 
simplified  by  the  Government's  demand  for  its 
product,  hurts  much  less  than  in  peace,  when 
industry  has  not  only  to  turn  out  the  stuff,  but  also 
find  a  buyer — often  a  more  difficult  and  expensive 
problem.  There  is  a  general  belief  that  by  paying 
for  war  by  loans  we  hand  the  business  of  paying  for 
it  on  to  posterity.  In  fact,  we  can  no  more  make 
posterity  pay  us  back  our  money  than  we  can  carry 
on  war  with  goods  that  posterity  will  produce. 
Whatever  posterity  produces  it  will  consume. 
Whatever  it  pays  in  interest  and  amortisation  of 
our  war  debt,  it  will  pay  to  itself.  We  cannot  get 
a  farthing  out  of  posterity.  All  we  can  do,  by 
leaving  it  a  debt  charge,  is  to  affect  the  distribution 
of  its  wealth  among  its  members.  Each  loan  that 
we  raise  makes  us  taxpayers  collectively  poorer  now, 
to  the  extent  of  the  capital  value  of  the  charge  on 


62    WAR  FINANCE  AS  IT  MIGHT  HAVE  BEEN 

our  incomes  that  it  involves.  The  less  we  thus 
charge  our  productive  power,  and  the  more  we  pay 
up  in  taxes  as  the  war  goes  on,  the  readier  we  shall 
be  to  play  a  leading  part  in  the  great  time  of 
reconstruction. 


A   LEVY   ON   CAPITAL 

January,  1918 

The  Objects  of  the  Levy— Its  Origin  and  History — How  it  would 
work  in  Practice — The  Attitude  of  the  Chancellor — The 
Effects  of  the  Scheme  in  discouraging  Thrift — Its  Fallacies 
and  Injustices — The  Insuperable  Obstacles  to  its  Application 
— Its  Influence  on  Production — One  of  the  Tests  of  a  Tax — 
Judged  by  this  Test  the  Proposed  Levy  is  doomed. 

BY  some  curious  mental  process  the  idea  of  a  levy 
on  capital  has  come  into  rapidly  increasing  promi- 
nence in  the  last  few  months,  and  seems  to  be  gaining 
popularity  in  quarters  where  one  would  least  expect 
it.  On  chfc  other  hand,  it  is  naturally  arousing 
intense  opposition,  both  among  those  who  would  be 
most  closely  affected  by  its  imposition,  and  also 
among  those  who  view  with  grave  concern  the  pos- 
sible and  probable  economic  effects  of  such  a  system 
of  dealing  with  the  national  debt.  I  say  "  dealing 
with  the  national  debt  "  because,  as  will  be  clear,  as 
a  system  of  raising  money  for  the  war  the  suggestion 
of  the  levy  on  capital  has  little  or  nothing  to  recom- 
mend it.  But,  as  will  also  be  made  clear,  the  pro- 
posal has  been  put  forward  as  a  thing  to  be  done 
immediately  in  order  to  increase  the  funds  in  the 
hands  of  the  Chancellor  of  the  Exchequer  to  be  spent 
on  war  purposes. 


64  A  LEVY   ON  CAPITAL 

A  levy  on  capital  is,  of  course,  merely  a  variation 
of  the  tax  on  property,  which  has  long  existed  in  the 
United  States,  and  had  been  resorted  to  before  now 
by  Governments,  of  which  the  German  Government 
is  a  leading  example,  in  order  to  provide  funds  for  a 
special  emergency.  This  it  can  very  easily  do  as 
long  as  the  levy  is  not  too  high.  If,  for  example,  you 
tax  a  man  to  the  extent  of  i  J  per  cent,  to  2  per  cent, 
of  the  value  of  his  property,  on  which  he  may  be 
earning  an  average  of  5  to  6  per  cent,  in  interest, 
then  the  levy  on  capital  becomes  merely  a  form  of 
income  tax,  assessed  not  according  to  the  income  of 
the  taxpayer  but  according  to  the  alleged  value  of 
his  property.  It  is  thus,  again,  a  variation  of  the 
system  long  adopted  in  this  country  of  a  special  rate 
of  income  tax  on  what  is  called  "  unearned  "  income, 
i.e.  income  from  invested  property.  But  it  is  only 
when  one  begins  to  adopt  the  broadminded  views 
lately  fashionable  of  the  possibilities  of  a  levy  on 
capital  and  to  talk  of  taking,  say,  20  per  cent,  of 
the  value  of  a  man's  property  from  him  in  the  course 
of  a  year,  that  it  becomes  evident  that  he  cannot 
be  expected  to  pay  anything  like  this  sum,  in  cash, 
unless  either  a  market  is  somehow  provided — which 
seems  difficult  if  all  property  owners  at  once  are  to 
be  mulcted  of  a  larger  amount  than  their  incomes—- 
or unless  the  Government  is  prepared  to  accept  part 
at  least  of  the  levy  in  the  shape  of  property  handed 
over  at  a  valuation. 

Before,  however,  we  come  to  deal  in  detail  with  the 
difficulties  and  drawbacks  of  the  suggestion,  it  may 
be  interesting  to  trace  the  history  of  the  movement 


THE   GROWTH   OF   THE   WAR         65 

in  its  favour,  and  to  see  some  of  the  forms  in 
which  it  has  been  put  forward.  It  may  be  said  that 
the  ball  was  opened  early  last  September  when,  in 
the  Daily  News  of  the  8th  of  that  month,  its  able 
and  always  interesting  editor  dealt  in  one  of  his 
illuminating  Saturday  articles  with  the  question  of 
"  How  to  Pay  for  the  War."  He  began  with  the 
assumption  that  the  capital  of  the  individuals  of  the 
nation  has  increased  during  the  war  from  16,000 
millions  to  20,000  millions.  A  10  per  cent,  levy  on 
this,  he  proceeded,  would  realise  2000  millions.  It 
would  extinguish  debt  to  that  amount  and  reduce 
the  interest  on  debt  by  120  millions.  The  levy 
would  be  graduated — say,  5  per  cent,  on  fortunes  of 
£1000  to  £20,000  ;  10  per  cent,  on  £20,000  to  £50,000 ; 
up  to  30  per  cent,  on  sums  over  £1,000,000  ;  and  the 
individual  taxpayer  was  to  pay  the  levy  "  in  what 
form  was  convenient,  in  his  stocks  or  his  shares,  his 
houses  or  his  fields,  in  personalty  or  realty/' 

Just  about  the  same  time  the  Round  Table,  a 
quarterly  magazine  which  is  usually  most  illuminating 
on  the  subject  of  finance,  chimed  in  with  a  more  or 
less  similar  suggestion  in  an  article  on  "  Finance 
After  the  War."  It  remarked  that  the  difficulty  of 
applying  a  levy  on  capital  is  "  probably  not  so  great 
as  appears  at  first  sight."  The  total  capital  wealth 
of  the  community  it  estimated  at  about  24,000 
millions  sterling.  To  pay  off  a^  war  debt  of  3000 
millions  would  therefore  require  a  levy  of  one-eighth. 
"  Evidently  this  could  not  be  raised  in  money,  nor 
would  it  be  necessary.  Holders  of  War  Loans  would 
pay  their  proportion  in  a  simple  way  by  surrendering 


66  A  LEVY   ON  CAPITAL 

one-eighth  of  their  scrip.  Holders  of  other  forms  of 
property  would  be  assessed  for  one-eighth  of  its  value 
and  be  called  on  to  acquire  and  to  surrender  to  the 
State  the  same  amount  of  War  Loan  scrip.  To  do 
this,  they  would  be  obliged  to  realise  a  part  of  their 
property  or  to  mortgage  it,  "  but,"  added  the  Round 
Table  cheerfully,  "  there  is  no  insuperable  difficulty 
about  that." 

The  first  thing  that  strikes  one  when  one  examines 
these  two  schemes  is  the  difference  in  their  view 
concerning  the  amount  of  capital  wealth  available 
for  taxation.  Mr  Gardiner  made  the  comparatively 
modest  estimate  of  16,000  millions  to  20,000  millions  ; 
the  Round  Table  plumps  for  24,000  millions,  and, 
incidentally,  it  may  be  remarked  that  some  con- 
servative estimates  put  it  as  low  as  11,000  millions. 
Thus  we  have  a  possible  range  for  the  fancy  of  the 
scheme  builder  of  from  11,000  to  24,000  millions  in 
the  property  on  which  taxation  is  proposed  to  be 
levied.  But  it  is  when  we  come  to  the  details  of 
these  schemes  that  the  difficulties  begin  to  glare. 
Mr  Gardiner  tells  us  that  millionaires  would  pay  up 
to  30  per  cent,  of  their  property,  and  that  they  would 
pay  in  what  form  was  convenient,  in  houses,  fields, 
etc.,  etc.  But  he  does  not  explain  by  what  principle 
the  Government  is  to  distribute  among  the  holders 
of  the  debt,  the  repayment  of  whom  is  the  object 
of  the  levy,  the  strange  assortment  of  miscellaneous 
assets  which  it  would  thus  collect  from  the  property 
owners  of  the  country. 

In  commenting  on  this  scheme  the  Economist  of 
September  i5th  took  the  case  of  a  man  with  a 


SOME  DIFFICULTIES  67 

fortune  of  £100,000  invested  before  the  war  in  a  well- 
assorted  list  of  securities,  the  whole  of  which  he  had, 
for  patriotic  reasons,  converted  during  the  war  into 
War  Loans.     He  would  have  no  difficulty  about 
paying  his  capital  levy,  for  he  would  obviously  sur- 
render something  between  10  and  20  per  cent,  of  his 
holding.     But,  "  in  exchange  for  nearly  two- thirds 
of  the  rest,  he  might  find  himself  landed  with  houses 
and  bits  of  land  all  over  the  country,  a  batch  of 
unsaleable  mining  shares,  a  collection  of  blue  china, 
a  pearl  necklace,  a  Chippendale  sideboard,  and  a 
doubtful   Titian."    The    Round   Table's  suggestion 
seems  to  be  even  more  impracticable.     According  to 
it,  holders  of  all  other  forms  of  property  besides 
War  Loans  would  be  assessed  for  one-eighth  of  its 
value — it  does  not  explain  how  the  value  is  to  be 
arrived  at,  nor  how  long  it  would  take  to  do  it — and 
would  then  be  called  on  to  acquire  and  to  surrender 
to  the  State  the  same  amount  of  War  Loan  scrip. 
To  do  this  they  would  be  obliged  to  realise  a  part 
of  their  property  or  to  mortgage  it,  a  process  which 
would  seem  likely  to  produce  a  pretty  state  of 
affairs  in  the  property  market ;  and  a  very  pleasant 
state  of  affairs  indeed  would  arise  for  the  holders  of 
War  Loan  scrip,  since  there  would  be  a  large  crowd 
of  compulsory  buyers  in  the  market  from  whom  the 
holders  would  apparently  be  able  to  extort  any  price 
that  they  liked  for  their  stock. 

The  next  stage  in  the  proceedings  was  a  deputa- 
tion to  the  Chancellor  of  the  Exchequer,  concerning 
which  more  anon,  of  leaders  of  various  groups  of  the 
Labour  Party,  to  press  upon  Mr  Bonar  Law  the 


68  A  LEVY   ON   CAPITAL 

principle  of  what  is  called  "  the  Conscription  of 
Wealth/'  and  the  publication  at  or  soon  after  that 
time,  which  was  about  the  middle  of  November,  of 
a  pamphlet  on  the  subject  of  the  "  Conscription  of 
Riches,"  by  the  War  Emergency  Workers'  National 
Committee,  i,  Victoria  Street,  S.W.  Among  what 
this  pamphlet  describes  as  "  the  three  practicable 
methods  of  conscripting  wealth"  No.  i  is  as 
follows: — 

A  Capital  Tax,  on  the  lines  of  the  present  Death 
Duties,  which  are  graduated  from  nothing  (on  estates 
under  £300,  and  legacies  under  £20)  up  to  about  20  per 
cent,  (on  very  large  estates  left  as  legacies  to  strangers). 

If  a  "  Death  Duty  "  at  the  existing  rates  were  now 
levied  simultaneously  on  every  person  in  the  kingdom 
possessing  over  £300  wealth  (every  person  might  be 
legally  deemed  to  have  died,  and  to  be  his  own  heir), 
it  might  yield  to  the  Chancellor  of  the  Exchequer  about 
£900,000,000.  It  would  be  necessary  to  offer  a  discount 
for  payment  in  cash  ;  and  in  order  to  avoid  simultaneous 
forced  sales,  to  accept,  in  lieu  of  cash,  securities  at  a 
valuation  ;  and  to  take  mortgages  on  land. 

Here  it  will  be  seen  that  the  Emergency  Workers 
had  improved  on  the  Round  Table,  and  agreed  with 
Mr  Gardiner,  by  providing  that  the  Government 
should  take  securities  at  a  valuation  and  mortgages 
on  land  in  lieu  of  cash  in  order  to  avoid  simultaneous 
forced  sales.  But  they  do  not  seem  to  have  per- 
ceived that,  in  so  far  as  the  Government  took  secu- 
rities or  accepted  mortgages  on  land,  it  would  not 
be  getting  money  to  pay  for  the  war,  which  was  the 
object  of  the  proposed  Conscription  of  Wealth,  but 
would  only  be  obtaining  property  from  which  the 


THE    FABIAN    OBJECT  69 

Government  would  in  due  course  later  on  receive  an 
income,  probably  averaging  about  one-twentieth  of 
its  value. 

Perhaps,  however,  it  would  be  more  correct  to 
say  that  those  who  put  the  scheme  forward  did  not 
ignore  this  drawback  to  it,  but  rather  liked  it,  for 
reasons  quite  irrelevant  to  the  objects  that  they 
were  apparently  pursuing.    A  good  deal  of  promi- 
nence was  given  about  the  same  time  to  the  question 
of  a   levy  on  capital  in  the  New  Statesman  well 
known  to  be  the  organ  of  Mr  Sidney  Webb  and  other 
members  of  the  Fabian  Society.     These  distinguished 
and  very  intellectual  Socialists  would,  of  course,  be 
quite  pleased  if,  in  an  apparent  endeavour  to  pay  for 
the  war,  they  actually  succeeded  in  securing,  by  the 
Government's  acquisition  of  blocks  of  securities  from 
property  owners,  that  official  control  of  industry  and 
production  which  is  the  object  of  State  Socialists. 

It  will  be  noted,  however,  in  this  scheme  that  no 
mention  is  made  of  any  forms  of  property  to  be 
accepted  by  the  Government  in  lieu  of  cash  except 
securities  and  mortgages  on  land.  Items  such  as 
furniture,  books,  pictures  and  jewellery  are  ignored, 
and  in  one  of  the  articles  in  the  New  Statesman,  dis- 
cussing the  question  of  a  capital  levy,  it  was  dis- 
tinctly suggested  that  these  commodities  should  be 
left  out  of  the  scheme  so  as  to  save  the  trouble 
involved  by  valuation.  Unfortunately,  if  we  leave 
out  these  forms  of  property  the  natural  result  is  to 
stimulate  the  tendency,  lately  shown  by  an  unfor- 
tunately large  number  of  patriotic  taxpayers,  of 
putting  money  into  pearl  necklaces  and  other  such 


70  A  LEVY  ON  CAPITAL 

gewgaws  in  order  to  avoid  income  tax.  If  by  buying 
fur  coats,  old  masters  and  diamond  tiaras  it  will  be 
be  possible  in  future  to  avoid  paying,  not  only 
income  tax,  but  also  a  capital  levy,  it  is  to  be  feared 
that  appeals  to  people  to  save  their  money  and  invest 
it  in  War  Bonds  are  likely  to  be  seriously  interfered 
with. 

Unfortunately,  the  Statesman  was  able  to  an- 
nounce that  the  appeal  for  this  system  of  taxation 
had  been  received  with  a  good  deal  of  sympathy  by 
the  Chancellor  of  the  Exchequer,  and  the  next  stage 
in  the  history  of  the  agitation  was  the  publication  on 
Boxing  Day  in  several  of  the  daily  papers  of  what 
appeared  to  be  an  official  summary,  issued  through 
the  Central  News,  of  what  the  Chancellor  had  said 
to  the  deputation  of  Labour  Leaders  introduced  by 
Mr  Sidney  Webb,  which  waited  on  him,  as  already 
described,  in  the  middle  of  November.  Having 
pointed  out  that  he  had  never  seen  any  proposal 
which  seemed  to  him  to  be  practicable  for  getting 
money  during  the  war  by  conscripting  wealth,  Mr 
Bonar  Law  added  that,  though  "  perhaps  he  had  not 
thought  enough  about  it  to  justify  him  in  saying  so," 
his  own  feeling  was  that  it  would  be  better,  both  for 
the  wealthy  classes  and  the  country,  to  have  this 
levy  on  capital,  and  reduce  the  burden  of  the  national 
debt  when  the  war  was  over.  It  need  not  be  said 
that  this  statement  by  the  Chancellor  has  been  very 
far  from  helpful  to  the  efforts  of  those  who  are  trying 
to  induce  unthrifty  citizens  to  save  their  money  and 
put  it  into  National  War  Bonds  for  the  finance  of 
the  war. 


THE   CHECK   TO    SAVING  71 

"  Why/'  people  argue,  "  should  we  go  out  of  our 
way  to  save  and  take  these  securities  if,  when  the 
war  is  over,  a  large  slice  of  our  savings  is  to  be  taken 
away  from  us  by  means  of  this  levy  on  capital  ?  If 
we  had  been  doubting  between  the  enjoyment  of 
such  comforts  and  luxuries  as  are  possible  in  war- 
time and  the  austere  duty  of  thrift,  we  shall  naturally 
now  choose  the  pleasanter  path,  spend  our  money 
on  ourselves  and  on  those  who  depend  on  us,  instead 
of  saving  it  up  to  be  taken  away  again  when  the  war 
is  over,  while  those  who  have  spent  their  money  as 
they  liked  will  be  let  off  scot  free."  Certainly,  it  is 
much  to  be  regretted  that  the  Chancellor  of  the 
Exchequer  should  have  let  such  a  statement  go  forth, 
especially  as  he  himself  admits  that  perhaps  he  has 
not  thought  enough  about  it  to  justify  him  in  saying 
so.  If  the  Chancellor  of  the  Exchequer  has  not 
time  to  think  about  what  he  is  going  to  say  to  a 
Labour  deputation  which  approaches  him  on  an 
extremely  important  revolution  in  our  fiscal  system, 
it  is  surely  high  time  that  we  should  get  one  who  has 
sufficient  leisure  to  enable  him  to  give  his  mind  to 
problems  of  this  sort  when  they  are  put  before  him. 

In  the  course  of  this  review  of  the  forms  in  which 
suggestions  for  a  levy  on  capital  have  been  put 
forward,  some  of  the  difficulties  and  injustices  in- 
herent in  it  have  already  been  pointed  out.  Its 
advocates  seem  as  a  rule  to  base  the  demand  for 
it  upon  an  assumption  which  involves  a  complete 
fallacy.  This  is  that,  since  the  conscription  of  life 
has  been  applied  during  the  war,  it  is  necessary  that 
conscription  of  wealth  should  also  be  brought  to 


72  A  LEVY  ON  CAPITAL 

bear  in  order  to  make  the  war  sacrifice  of  all  classes 
equal.  For  instance,  the  Emergency  Workers' 
pamphlet,  quoted  above,  states  that,  "  in  view  of 
the  fact  that  the  Government  has  not  shrunk  from 
Compulsory  Conscription  of  Men,"  the  Committee 
demands  that  "  for  all  the  future  money  required 
to  carry  on  the  war,  the  Government  ought,  in 
common  fairness,  to  accompany  the  Conscription  of 
Men  by  the  Conscription  of  Wealth." 

This  contention  seems  to  imply  that  the  con- 
scription of  men  and  the  conscription  of  wealth  apply 
to  two  different  classes ;  in  other  words,  that  the 
owners  of  wealth  have  been  able  to  avoid  the  con- 
scription of  men.  This,  of  course,  is  absolutely 
untrue.  The  wealthiest  and  the  poorest  have  to 
serve  the  country  in  the  front  line  alike,  if  they  are 
fit.  The  proportion  of  those  who  are  fit  is  probably 
higher  among  the  wealthy  classes,  and,  consequently, 
the  conscription  of  men  applies  to  them  more  severely* 
Again,  the  officers  are  largely  drawn  from  the  com- 
paratively wealthy  classes,  and  it  is  pretty  certain 
that  the  proportion  of  casualties  among  officers  has 
been  higher  during  the  war  than  among  the  rank  and 
file.  Thus,  as  far  as  the  conscription  of  men  is  con- 
cerned, the  sacrifice  imposed  upon  all  classes  in  the 
community  is  alike,  or,  if  anything,  presses  rather 
more  heavily  upon  those  who  own  wealth.  Con- 
scription of  wealth  as  well  as  conscription  of  life 
thus  involves  a  double  sacrifice  to  the  owners  of 
property. 

This  double  sacrifice,  in  fact,  the  owners  of  pro- 
perty have,  as  is  quite  right,  borne  throughout  the 


THE   DOUBLE   SACRIFICE  73 

war  by  the  much  more  rapid  increase  in  direct 
taxation  than  in  indirect.  It  is  right  that  the  owners 
of  property  should  bear  the  heavier  monetary 
burden  of  the  war  because  they,  having  more  to  lose 
and  therefore  more  to  gain  by  a  successful  end  of  the 
war,  should  certainly  pay  a  larger  proportion  of  its 
cost.  It  was  also  inevitable  that  they  should  do  so 
because,  when  money  is  wanted  for  the  war  or  any 
other  purpose,  it  can  only  be  taken  in  large  amounts 
from  those  who  have  a  surplus  over  what  is  needed 
to  provide  them  with  the  necessaries  and  decencies 
of  life.  But  the  argument  which  puts  forward  a 
capital  levy  on  the  ground  that  the  rich  have  been 
escaping  war  sacrifice  is  fallacious  in  itself,  and  is  a 
wicked  misrepresentation  likely  to  embitter  still 
further  the  bad  feeling  between  classes. 

Nevertheless,  Mr  Bonar  Law  thinks  that,  since 
the  cost  of  the  war  must  inevitably  fall  chiefly  upon 
the  owners  of  property,  and  since  it  therefore  becomes 
a  question  of  expediency  with  them  whether  they 
should  pay  at  once  in  the  form  of  a  capital  levy  or 
over  a  long  series  of  years  in  increased  taxation,  he 
is  inclined  to  think  that  the  former  method  is  one 
which  would  be  most  convenient  to  them  and  best 
for  the  country.  This  contention  cannot  be  set  aside 
lightly,  and  there  can  be  no  doubt  that  if,  by  making 
a  dead  lift,  the  wealthy  classes  of  the  country  could 
throw  off  their  shoulders  a  large  part  of  the  burden 
of  the  war  debt,  such  a  scheme  is  well  worth  con- 
sidering as  long  as  it  does  not  carry  with  it  serious 
drawbacks. 

It  seems  to  me,  however,  that  the  drawbacks  are 


74  A  LEVY  ON  CAPITAL 

very  considerable.  In  the  first  place,  I  have  not 
seen  any  really  practicable  scheme  of  redeeming 
debt  by  means  of  a  levy  on  capital.  In  so  far  as 
the  levy  is  paid  in  the  form  of  surrendered  War 
Loans,  it  is  simple  enough.  In  so  far  as  it  is  paid 
in  other  securities  or  mortgages  on  land  or  other 
forms  of  property,  it  is  difficult  to  see  how  the  assets 
acquired  by  the  State  through  the  levy  could  be 
distributed  among  the  debt  holders  whom  it  is  pro- 
posed to  pay  off.  Would  they  be  forced  to  take 
securities,  mortgages  on  land,  furniture,  etc.,  as  the 
Government  chose  to  distribute  them,  or  would  the 
Government  have  to  nurse  an  enormous  holding  of 
various  forms  of  property  and  gradually  realise  them 
and  so  pay  off  debt  ? 

Again,  a  great  injustice  would  surely  be  involved 
by  laying  the  whole  burden  of  this  oppressive  levy 
upon  owners  of  accumulated  property,  so  penalising 
those  who  save  capital  for  the  community  and  letting 
off  those  who  squander  their  incomes.  A  charac- 
teristic argument  on  this  point  was  provided  by  the 
New  Statesman  in  a  recent  issue.  It  argued  that, 
because  ordinary  income  tax  would  still  be  exacted, 
the  contrast  between  the  successful  barrister  with  an 
income  of  £20,000  a  year  and  no  savings,  who  would 
consequently  escape  the  capital  levy,  and  the  poor 
clergyman  who  had  saved  £1000  and  would  con- 
sequently be  liable  to  it,  fell  to  the  ground.  In  other 
words,  because  both  lawyer  and  parson  paid  income 
tax,  it  was  fair  that  the  former  should  escape  the 
capital  levy  while  the  latter  should  have  to  pay  it ! 

But  needs  must  when  the  devil  drives,  and  in  a 


PROBABLE   EFFECTS  75 

crisis  of  this  kind  it  is  not  always  possible  to  look  too 
closely  into  questions  of  equity  in  raising  money. 
It  is  necessary,  however,  to  look  very  closely  into  the 
probable  economic  effects  of  any  suggested  form  of 
taxation,  and,  if  we  find  that  it  is  likely  to  diminish 
the  future  wealth  production  of  the  nation,  to  reject 
it,  however  attractive  it  may  seem  to  be  at  first 
sight.  A  levy  on  capital  which  would  certainly 
check  the  incentive  to  save,  by  the  fear  that,  if  such 
a  thing  were  once  successfully  put  through,  it  might 
very  likely  be  repeated,  would  dry  up  the  springs 
of  that  supply  of  capital  which  is  absolutely  essential 
to  the  increase  of  the  nation's  productive  power. 
Moreover,  business  men  who  suddenly  found  them- 
selves shorn  of  10  to  20  per  cent,  of  their  available 
capital  would  find  their  ability  to  enter  into  fresh 
enterprise  seriously  diminished  just  at  the  very  time 
when  it  is  essential  that  all  the  organisers  of  pro- 
duction and  commerce  in  this  country  should  be 
most  actively  engaged  in  every  possible  form  of 
enterprise,  in  order  to  make  good  the  ravages 
of  war. 


VI 

OUR   BANKING  MACHINERY 

February,  1918 

The  Recent  Amalgamations — Will  the  Provinces  suffer  ? — Con- 
solidation not  a  New  Movement — The  Figures  of  the  Past 
Three  Decades — Reduction  of  Competition  not  yet  a 
Danger — The  Alleged  Neglect  of  Local  Interests — Shall  we 
ultimately  have  One  Huge  Banking  Monopoly  ? — The 
Suggested  Repeal  of  the  Bank  Act — Sir  E.  Holden's 
Proposal. 

BANKING  problems  have  lately  loomed  large  in  the 
financial  landscape.  It  will  be  remembered  that 
about  a  year  and  a  half  ago  a  Committee  was  ap- 
pointed to  consider  the  creation  of  a  new  institution 
specially  adapted  for  financing  overseas  trade  and 
for  the  encouragement  of  industrial  and  other 
ventures  through  their  years  of  infancy,  and  that 
the  charter  which  was  finally  granted  to  the  British 
Trade  Corporation,  as  this  institution  was  ultimately 
called,  roused  a  great  deal  of  opposition  both  on  the 
part  of  banks  and  of  traders  who  thought  that  a 
Government  institution  "with  a  monopoly  character 
was  going  to  cut  into  their  business  with  the  help 
of  a  Government  subsidy.  In  fact,  there  was  no 
subsidy  at  all  in  question,  and  the  fears  of  the 


AMALGAMATIONS  77 

trading  world  of  competition  on  the  part  of  the  new 
chartered  institution  only  arose  owing  to  its  unfor- 
tunate name,  which  was  given  to  it  in  order  to  allay 
the  apprehensions  of  the  banks  which  had  been 
provoked  by  the  title  originally  designed  for  it, 
namely,  the  British  Trade  Bank.  There  seems  no 
reason  why  this  Company  should  not  do  good  work 
for  British  trade  without  treading  on  the  toes  of 
anybody.  Although  naturally  its  activities  cannot 
be  developed  on  any  substantial  scale  until  the  war 
is  over,  its  Chairman  assured  the  shareholders  at 
'the  end  of  January  that  its  preliminary  spadework 
was  being  carefully  attended  to. 

After  this  small  storm  in  a  teacup  had  died  down 
those  interested  in  our  banking  efficiency  were 
again  excited  by  the  rapid  progress  made  by  the 
process  of  amalgamation  among  our  great  banks, 
which  began  to  show  acute  activity  again  in  the 
last  months  of  1917.  The  suddenly  announced 
amalgamation  of  the  London  and  South- Western 
and  London  and  Provincial  Banks  led  to  a  whole 
host  of  rumours  as  to  other  amalgamations  which 
were  to  follow ;  and  though  most  of  these  proved 
to  be  untrue  a  fresh  sensation  was  aroused  when 
the  union  was  announced  of  the  National  Provincial 
Bank  of  England  and  the  Union  of  London  and 
Smith's  Bank.  All  the  old  arguments  were  heard 
again  on  the  subject  of  the  objections,  from  the 
point  of  view  of  industry  in  the  provinces,  to  the 
formation  of  great  banking  institutions,  with  enor- 
mous figures  on  both  sides  of  the  balance-sheet, 
working  from  London,  often,  it  was  alleged,  with 


78  OUR  BANKING  MACHINERY 

no  consideration  for  the  needs  of  the  provincial 
users  of  credit.  These  latest  amalgamations,  which 
have  united  banks  which  already  had  head  offices 
in  London,  gave  less  cause  than  usual  for  these 
provincial  apprehensions,  which  had  far  more  solid 
reason  behind  them  when  purely  provincial  banks 
were  amalgamated  with  institutions  whose  head 
office  was  in  London.  Nevertheless,  the  argument 
was  heard  that  the  great  size  and  scale  on  which 
these  amalgamated  banks  were  bound  to  work 
would  necessarily  make  them  more  monopolistic 
and  bureaucratic  in  their  outlook,  and  less  elastic 
and  adaptable  in  their  dealings  with  their  local 
customers. 

It  seems  to  me  that  there  is  so  far  very  little 
solid  ground  for  any  apprehension  on  the  part  of 
the  business  community  that  the  recent  development 
of  banking  evolution  will  tend  to  any  damage  to 
their  interests.  The  banks  have  grown  in  size  with 
the  growth  of  industry.  As  industry  has  tended 
more  and  more  to  be  worked  by  big  battalions,  it 
became  necessary  to  have  banking  institutions  with 
sufficiently  large  resources  at  their  command  to 
meet  the  great  requirements  of  the  huge  industrial 
organisations  that  they  had  to  serve.  Nevertheless, 
the  tendency  towards  fewer  banks  and  bigger  figures 
has  grown  with  extraordinary  celerity,  as  the  follow- 
ing table  shows : — 


AMALGAMATION'S   PROGRESS 


79 


MOVEMENT  OF  ENGLISH  JOINT-STOCK  BANK  DEPOSITS,  ETC., 

SINCE    1886. 


December 
3ist. 

No. 
of 
Banks. 

Number 
of 
Branches. 

Capital 
Paid  up. 

Deposit  and 
Current 
Accounts. 

Total 
Liabilities. 

1886 

109 

1,547 

£38,468,000 

£299,195,000 

£376,808,000 

1891 

1  06 

2,245 

43,406,000 

391,842,000 

486,632,000 

1896 

94 

3,051 

45,203,000 

495,233,°°° 

599,518,000 

1901 

74 

3,935 

46,631,000 

584,841,000 

698,150,000 

1906 

55 

4,840 

48,122,000 

647,889,000 

782,353,000 

1911 

44 

5,417 

47,265,000 

748,641,000 

885,069,000 

1916 

35 

5,993 

48,237,000 

1,154,877,000 

1,316,220,000 

This  table  is  taken  from  the  annual  banking 
numbers  of  the  Economist.  It  will  be  noticed  that 
in  1886  there  were  in  England  109  joint-stock  banks 
with  1547  offices,  whose  accounts  were  tabulated 
in  the  Economist's  annual  review.  Their  total  paid- 
up  capital  was  38  J  millions,  their  deposit  and 
current  accounts  were  just  under  300  millions,  and 
their  total  liabilities  were  377  millions.  In  the 
course  of  thirty  years  the  109  banks  had  shrunk  by 
the  process  of  amalgamation  and  absorption  to 
thirty-five,  that  is  to  say,  they  had  been  divided 
by  three  ;  the  number  of  their  offices,  however,  had 
been  multiplied  by  nearly  four,  while  their  deposit 
accounts  had  grown  from  300  millions  to  1155,  and 
their  total  liabilities  from  377  to  1316  millions.  By 
the  amalgamations  announced  at  the  end  of  1917, 
and  that  of  the  County  of  Westminster  with  Parr's 
announced  on  February  ist,  the  number  of  joint 
stock  banks  will  be  reduced  to  32.  The  picture 
would  be  still  more  striking  if  the  figures  of  the 


8o  OUR  BANKING  MACHINERY 

private  banks  were  included,  since  their  number 
has  been  reduced,  since  1891,  from  37  to  6.  These 
figures  are  eloquent  of  the  manner  in  which  the 
number  of  individual  banks  has  been  reduced,  while 
the  extent  of  the  banking  accommodation  given  to 
the  community  has  enormously  grown,  so  that  the 
power  wielded  by  each  individual  bank  has  increased 
by  the  force  of  both  these  processes. 

The  consequent  reduction  in  competition  which 
is  causing  some  concern  among  the  trading  com- 
munity has  not,  as  it  seems  to  me,  gone  far  enough 
yet  to  be  a  serious  danger.  The  idea  that  the  big 
banks  with  offices  in  London  give  scant  considera- 
tion to  the  needs  of  their  local  customers  seems  to 
be  so  contrary  to  the  interests  of  the  banks  that 
they  would  be  extraordinarily  bad  men  of  business 
if  those  who  were  responsible  for  their  management 
allowed  it  to  be  the  fact.  It  is  probably  nearer  the 
truth  that  banking  competition  in  the  provinces  is 
still  so  keen  that  the  London  management  is  very 
careful  not  to  allow  anything  like  bureaucratic  stiff- 
ness to  get  into  the  methods  by  which  their  business 
is  managed.  By  the  appointment  of  local  com- 
mittees they  are  careful  to  do  all  they  can  to  see 
that  the  local  interests  get  all  the  credit  that  is 
good  for  them.  That  local  interests  get  as  much 
credit  as  they  want  is  probably  very  seldom  the 
case,  because  it  is  a  natural  instinct  on  the  part  of 
an  eager  business  man  to  want  rather  more  credit 
than  he  ought  to  have,  from  a  banking  point  of  view. 
Business  interests,  as  long  as  they  exist  in  private 
hands,  will  always  want  rather  more  credit  than 


THE    SENTIMENTAL   ASPECT  Si 

there  is  available,  and  it  will  always  be  the  duty  of 
the  banker  to  ensure  that  the  country's  industry  is 
kept  on  a  sound  basis  by  checking  the  tendency  of 
the  eager  business  man  to  undertake  rather  more 
than  is  good  for  him.  From  the  sentimental  point 
of  view  it  is  certainly  a  pity  to  have  seen  many  of 
the  picturesque  old  private  banks  extinguished,  the 
partners  in  which  were  in  close  personal  touch  with 
their  customers,  and  entered  into  the  lives  of  the 
local  communities  in  a  manner  which  their  modern 
counterpart  is  perhaps  unable  to  do.  Nevertheless, 
it  is  difficult  to  get  away  from  the  fact  that  if  these 
institutions  had  been  as  efficient  and  as  well  managed 
as  their  admirers  depict  them  to  have  been  they 
would  hardly  have  been  driven  out  of  existence  by 
the  stress  of  modern  developments  and  competition. 
Whatever  we  may  think  of  modern  competition,  in 
certain  of  its  aspects,  we  may  at  least  be  sure  of  this 
—that  it  does  not  destroy  an  institution  which  is 
really  wanted  by  the  business  community.  And  if 
the  complaint  of  local  interests  is  true,  that  they  are 
swamped  by  the  cosmopolitan  aspirations  of  the 
great  London  offices,  they  always  have  it  in  their 
power  to  create  an  institution  of  the  kind  that  they 
want,  and  by  giving  it  their  business  to  ensure  for 
it  a  prosperous  career.  As  long  as  no  such  tendency 
is  visible  in  the  banking  world  we  may  be  pretty 
sure  that  the  views  expressed  concerning  the  neglect 
of  local  interests  by  the  enormous  banks  which  have 
grown  up  with  London  centres  in  the  last  thirty 
years  is  to  a  great  extent  a  myth.  It  has  now 
been  announced,  however,  that  the  whole  problem 


82  OUR  BANKING  MACHINERY 

involved  by  the  amalgamation  process  is  to  be  sifted 
by  a  committee  to  be  appointed  for  this  purpose. 

Another  apprehension  has  arisen  in  the  minds  of 
those  who  view  with  critical  vigilance  the  present 
tendencies  of  business  and  the  present  development 
of  economic  opinion  among  a  great  section  of  the 
community.  If,  it  is  urged,  the  banks  continue  to 
swallow  one  another  up  by  the  process  of  amalgama- 
tion, how  will  this  tendency  end  except  in  the  creation 
of  one  huge  bank  working  a  gigantic  money  mono- 
poly which  the  Socialistic  tendencies  of  the  present 
day  will,  with  some  reason,  insist  ought  to  be  taken 
over  by  the  State  for  the  profit  of  the  taxpayer  ? 
This  view  is  frankly  put  forward  by  those  advocates  of 
a  Socialistic  organisation  of  society,  who  say  that  the 
modern  tendency  of  industry  towards  combinations, 
rings  and  trusts  is  rapidly  bringing  the  Socialistic 
millennium  within  their  reach  without  any  effort  on 
the  part  of  Socialistic  preachers.  They  consider 
that  the  trust  movement  is  doing  the  work  of 
Socialism,  much  faster  than  Socialism  could  do  it 
for  itself ;  that,  in  short,  as  has  been  argued  above 
in  regard  to  banking,  the  tendency  towards  centrali- 
sation and  the  elimination  of  competition  can  only 
end  in  the  assumption  by  the  State  of  the  functions 
of  industry  and  finance.  If  this  should  be  so,  the 
future  is  dark  for  those  of  us  who  believe  that 
individual  effort  is  the  soul  of  industrial  and  financial 
progress,  and  that  industry  carried  on  by  Govern- 
ment Departments,  however  efficient  and  economical 
it  might  be,  would  be  such  a  deadly  dull  and  un- 
enterprising business  that  all  the  adaptability  and 


GOVERNMENT  METHODS  83 

tendency  to  variation  in  accordance  with  the  needs 
of  the  moment,  which  are  so  strongly  shown  by 
individual  enterprise,  would  be  lost,  to  the  great 
detriment  of  the  material  progress  of  mankind. 

As  things  are  at  present,  there  is  little  need  to 
fear  that  Socialistic  organisation  of  industry  could 
stand  up  against  competent  individual  effort.  Any- 
body who  has  ever  had  any  business  dealings  with  a 
Government  Department  will  inevitably  shudder 
when  he  tries  to  imagine  how  many  forms  would 
have  to  be  filled  up,  how  many  divisions  of  the 
Department  the  inevitable  mass  of  papers  would 
have  to  go  through,  and  how  much  delay  and  tedium 
would  be  involved  before  the  simplest  business  pro- 
position could  be  carried  out.  But,  of  course,  it  is 
argued  by  Socialists  that  Government  Departments 
are  only  slow  and  tied  up  with  red  tape  because  they 
have  so  long  been  encouraged  to  do  as  little  as 
possible,  and  that  as  soon  as  they  are  really  urged 
to  do  things  instead  of  pursuing  a  policy  of  masterly 
inactivity,  there  is  no  reason  why  they  should  not 
develop  a  promptitude  and  elasticity  quite  as  great 
as  that  hitherto  shown  by  the  business  community. 
That  such  a  development  as  this  might  take  place 
in  the  course  of  generations  nobody  can  deny ;  at 
present  it  must  be  admitted  that  with  the  great 
majority  of  men  the  money-making  incentive  is 
required  to  get  the  best  out  of  them.  If  the  process 
of  education  produces  so  great  a  change  in  the  human 
spirit  that  men  will  work  as  well  for  the  small  salary 
of  the  Civil  Service,  with  a  K.C.B.  thrown  in,  as 
they  will  now  in  order  to  gain  the  prizes  of  industry 


84  OUR  BANKING  MACHINERY 

and  finance,  then  perhaps,  from  the  purely  economic 
point  of  view,  the  Socialisation  of  banking  may  be 
justified.  But  we  are  a  long  way  yet  from  any  such 
achievement,  and  if  it  is  the  case  that  the  rapid 
centralisation  of  banking  power  in  comparatively 
few  hands  carries  with  it  the  danger  of  an  attempt 
to  nationalise  a  business  which  requires,  above  all, 
extreme  adaptability  and  sensitiveness  to  the  needs 
of  the  moment  as  they  arise,  this  is  certainly  a 
danger  which  has  to  be  carefully  considered  by  those 
who  are  responsible  for  the  development  of  these 
amalgamation  processes. 

And  now  another  great  stone  has  been  thrown 
into  the  middle  of  the  banking  pond,  causing  an 
ever-widening  circle  of  ripples  and  provoking  the 
beginning  of  a  discussion  which  is  likely  to  be  with 
us  for  some  time  to  come.  Sir  Edward  Holden,  at 
the  meeting  of  the  London  City  and  Midland  Bank 
shareholders  on  January  29th,  made  an  urgent 
demand  for  the  immediate  repeal  of  the  Bank  Act 
of  1844.  This  Act  was  passed,  as  all  men  know,  in 
order  to  restrict  the  creation  of  credit  in  the  United 
Kingdom.  In  the  early  part  of  the  last  century  the 
most  important  part  of  a  bank's  business  consisted 
of  the  issue  of  notes,  and  banking  had  been  carried 
on  in  a  manner  which  the  country  considered  un- 
satisfactory because  banks  had  not  paid  sufficient 
attention  to  the  proportion  of  cash  that  they  ought 
to  hold  in  their  tills  to  meet  notes  if  they  were 
presented.  Parliament  in  its  wisdom  consequently 
ordained  that  the  amount  of  notes  which  the  banks 
should  be  allowed  to  issue,  except  against  actual 


PEEL'S   ACT  85 

metal  in  their  vaults,  should  be  fixed  at  the  amount 
of  their  issue  at  that  time.  Above  the  limit  so  laid 
down  any  notes  issued  by  the  banks  were  to  be 
backed  by  metal.  In  the  case  of  the  Bank  of 
England  the  limit  then  established  was  £14,000,000, 
and  it  was  enacted  that  if  any  note-issuing  bank 
gave  up  its  right  to  a  note  issue  the  Bank  of  England 
should  be  empowered  to  increase  its  power  to  issue 
notes  against  securities  to  the  extent  of  two-thirds 
of  the  power  enjoyed  by  the  bank  which  was  giving 
up  its  privilege.  By  this  process  the  Bank  of 
England's  right  to  issue  notes  against  securities, 
what  is  usually  called  its  fiduciary  issue,  has  risen 
to  £18,450,000  ;  above  that  limit  every  note  issued 
by  it  has  to  be  backed  by  bullion,  and  is  actually 
backed  by  gold,  though  under  the  Act  one-fifth 
might  be  in  silver.  It  was  thus  anticipated  by  the 
framers  of  the  Act  that  in  future  any  credit  required 
by  industry  could  only  be  granted  by  an  increase  in 
the  gold  held  by  the  issuing  banks.  If  the  Act  had 
fulfilled  the  anticipations  of  the  Parliament  which 
passed  it,  if  English  trade  had  grown  to  anything  like 
the  extent  which  it  has  done  since,  it  could  only  have 
done  so  by  the  amassing  of  a  mountain  of  gold,  which 
would  have  lain  in  the  vaults  of  the  Bank  of  England. 
Fortunately,  however,  the  banking  community 
had  at  its  disposal  a  weapon  of  which  it  was  already 
making  considerable  use,  namely,  the  system  of 
issuing  credit  by  means  of  banking  deposits  operated 
on  by  cheques.  Eight  years  before  Peel's  Act  was 
passed  two  Joint  Stock  Banks  had  been  founded  in 
London,  although  the  Bank  of  England  note-issuing 

G 


86  OUR  BANKING  MACHINERY 

monopoly  still  made  it  impossible  for  any  Joint 
Stock  Bank  to  issue  notes  in  the  London  district. 
It  is  thus  evident  that  deposit  banking  was  already 
well  founded  as  a  profitable  business  when  Peel, 
and  Parliament  behind  him,  thought  that  they 
could  sufficiently  regulate  the  country's  banking 
system  so  long  as  they  controlled  the  issue  of  notes 
by  the  Bank  of  England  and  other  note-issuing 
banks.  It  is  perhaps  fortunate  that  Parliament 
made  this  mistake,  and  so  enabled  our  banking 
machinery  to  develop  by  means  of  deposit  banking, 
and  so  to  ignore  the  hard-and-fast  regulations  laid 
upon  it  by  Peel's  Act.  This,  at  least,  is  what  has 
happened ;  only  in  times  of  acute  crisis  have  the 
strict  regulations  of  Peel's  Act  caused  any  incon- 
venience, and  when  that  inconvenience  arose  the 
Act  has  been  suspended  by  the  granting  of  a  letter 
of  indemnity  from  the  Treasury  to  the  Governor  of 
the  Bank. 

Under  Peel's  Act  the  present  rather  anomalous 
form  of  the  Bank  of  England's  Weekly  Return  was 
also  laid  down.  It  shows,  as  all  men  know,  two 
separate  statements ;  one  of  the  Issue  Department 
and  the  other  of  the  Banking  Department.  The 
Issue  Department's  statement  shows  the  notes 
issued  as  a  liability,  and  on  the  assets  side  Govern- 
ment debt  and  other  securities  (which  are,  in  fact,  also 
Government  securities),  amounting  to  £18,450,000 
as  allowed  by  the  Act,  and  a  balance  of  gold.  The 
Banking  Department's  statement  shows  capital, 
"  Rest  "  or  reserve  fund,  and  deposits,  public  and 
other,  among  the  liabilities,  and  on  the  other  side 


THE  HOLDEN  PLAN  87 

of  the  account  Government  and  other  securities,  all 
the  notes  issued  by  the  Issue  Department  which 
are  not  in  circulation,  and  a  small  amount  of  gold 
and  silver  which  the  Banking  Department  holds  as 
till  money. 

Sir  Edward  Holden's  proposal  is  that  the  Act 
should  be  repealed  practically  in  accordance  with 
the  system  which  has  been  adopted  by  the  German 
Reichsbank.  The  principles  which  he  enumerates, 
as  those  on  which  other  national  banks  of  issue 
work,  are  as  follows  : — 

1.  One  bank  of  issue,  and  not  divided  into  de- 
partments. 

2.  Notes  are  created  and  issued  on  the  securitj' 
of  bills  of  exchange  and  on  the  cash  balance,  so  that 
a  relation  is  established  between  the  notes  issued 
and  the  discounts. 

3.  The  notes  issued  are  controlled  by  a  fixed 
ratio  of  gold  to  notes  or  of  the  cash  balance  to  notes. 

4.  This  fixed  ratio  may  be  lowered  on  payment 
of  a  tax. 

5.  The  notes  should  not  exceed  three  times  the 
gold  or  cash  balance. 

By  this  revolution  Sir  Edward  would  abolish  all 
legal  restriction  on  the  issue  of  notes  by  the  Bank 
of  England.  It  would  hold  a  certain  amount  of  gold 
or  a  certain  amount  of  cash  balance  against  its  notes, 
but  in  the  "  cash  balance  "  Sir  Edward  apparently 
would  include  n  millions  odd  of  Government  debt, 
or  of  Treasury  notes.  As  long  as  its  notes  were  only 
three  times  the  amount  of  the  gold  or  of  the  "  cash 
balance,"  and  were  backed  as  to  the  other  two-thirds 


88  OUR  BANKING  MACHINERY 

by  bills  of  exchange,  the  situation  would  be  regarded 
as  normal,  but  if,  owing  to  abnormal  circumstances, 
the  Bank  desired  to  increase  the  amount  of  notes 
issued  against  bills  of  exchange  only  and  to  reduce 
the  ratio  of  its  gold  or  its  cash  balance  to  its  notes,  it 
would,  at  any  time,  be  enabled  to  do  so  by  the  pay- 
ment of  a  tax,  without  going  through  the  humiliating 
necessity  for  an  appeal  to  the  Treasury  to  allow  it 
to  exceed  the  legal  limit. 

At  the  same  time,  by  the  abolition  of  Peel's  Act 
the  cumbrous  methods  of  stating  the  Bank's  position, 
as  published  week  by  week  in  the  Bank  Return, 
would  be  abolished.  The  two  accounts  would  be 
put  together,  with  the  result  that  the  Bank's  position 
would  be  apparently  stronger  than  it  appears  to  be 
under  the  present  system,  which  makes  the  Banking 
Department's  Return  weak  at  the  expense  of  the 
great  strength  that  it  gives  to  the  appearance  of 
the  Issue  Department.  This  will  be  shown  from  the 
following  statement  given  by  Sir  Edward  Holden  of 
the  Return  as  issued  on  January  i6th,  and  as 
amended  according  to  his  ideas  : — 

BANK  STATEMENT,    JANUARY   16,  1918. 

ISSUE  DEPARTMENT. 

Notes  Issued       .     .  £76,076,000  Gold £57,626,000 

Government  Debt   .      .     11,015,000 
Other  Securities.      .      .       7,435,ooo 

£76,076,000  £76,076,000 

Ratio  of  Gold  to  Notes  Issued «* 75-7  per  cent. 
BANKING  DEPARTMENT. 

Capital £i4.553,ooo    Government  Securities   .      .  £56,768,000 

Rest 3,363,000    Other  Securities  ....     92,278,000 

Deposits —  Notes         .     .     £30,750,000 

Public    £41,416,000  Gold  and  Silver      1,143,000 

Other      121,589,000 

•  163,005,000  '  31,893,000 

Other  Liabilities   .     .     .         18,000 

£180,939,000  £180,939,000 

Ratio  of  Cash  Balance  to  Liabilities  m  19*6  pec  cent. 


THE   HOLDEN   PLAN  89 


RECONSTRUCTED  BALANCE-SHEET  OF  THE  BANK, 
JANUARY  1 6,  1918. 

Capital £i4,553,ooo    Gold  .      .      .£58,768,000 

Rest 3,363,000    Currency  Notes    .   11,015,000 

Notes  Issued  (circulation)     45,325,000  £69,783,000 

Deposits 163,005,000    Government  Seen- 

Other  Liabilities    .     .     .  18,000        rities      .     .     .  56,768,000 

Other  Securities      7,435,ooo 

64,203,000 

Other  Securities  ....     92,278,000 


£226,264,000  £226,264,00 

Ratio  of  Gold  to  Notes    .     .  =1297  per  cent. 

,,      ,,  Cash  Balance  to  Liabilities  =  33-5      „ 

It  need  not  be  said  that  these  proposals  have 
aroused  the  liveliest  interest.  At  the  Bank  Meetings 
held  since  then  several  chairmen  have  been  asked 
by  their  shareholders  to  express  their  views  on  Sir 
Edward's  proposed  revolution.  Sir  Felix  Schuster 
pronounced  cautiously  in  favour  of  the  revision  of 
the  Bank  Act,  and  said  that  he  had  advocated  it 
seventeen  years  ago.  Lord  Inchcape,  at  the  National 
Provincial  Meeting,  thought  that  the  matter  required 
careful  consideration.  Most  of  us  will  agree  with 
this  view.  There  is  certainly  much  to  be  said  for 
a  reform  of  the  Weekly  Statement  of  the  Bank  of 
England,  giving,  it  may  be  added,  a  good  deal  more 
detail  than  Sir  Edward's  revised  balance-sheet 
affords.  But  concerning  his  proposal  to  reconstruct 
our  system  of  note  issue  on  a  foreign  model,  there  is 
certain  to  be  much  difference  of  opinion.  In  the 
first  place,  owing  to  the  development  of  our  system 
of  banking  by  deposit  and  cheque  rather  than  by 
issue  and  circulation  of  notes,  the  note  issue  is  not 
nearly  so  important  a  business  in  normal  times  in 
this  country  as  it  is  in  Germany  and  France. 


go  OUR  BANKING  MACHINERY 

Moreover,  the  check  imposed  upon  our  banking  com- 
munity by  the  need  for  an  appeal  to  the  Treasury 
before  it  can  extend  its  note  issue  beyond  a  certain 
point  often  acts  with  a  salutary  effect,  and  the  view 
has  even  been  expressed  that  if  that  check  were 
taken  away  from  our  system  it  might  be  difficult, 
if  not  impossible,  to  maintain  the  gold  standard 
which  has  been  of  such  enormous  value  in  building 
up  the  prestige  of  London  as  a  financial  centre.  I 
do  not  think  there  is  much  weight  in  this  argument, 
since,  under  Sir  Edward's  plan,  the  note  issue  could 
only  be  increased  against  discounts,  and  the  Bank, 
by  the  charge  that  it  made  for  discounts,  would  still 
be  able  to  control  the  situation.  From  the  practical 
point  of  view  of  the  present  moment,  a  strong  objec- 
tion to  the  scheme  is  that  it  would  open  the  door  to 
fresh  inflation  by  unrestricted  credit-making  just 
when  the  dangers  of  this  process  are  beginning  to 
dawn  even  on  the  minds  of  our  rulers. 


VII 

THE  COMPANIES  ACTS 

March,  1918? 

Another  Government  Committee — The  Fallacy  of  imitating 
Germany — Prussianising  British  Commerce — The  Inquiry 
into  the  Companies  Acts — Will  Labour  Influence  dominate 
the  Report  ?—Increased  Production  the  Great  Need — Will 
it  be  met  by  tightening  up  the  Companies  Acts  ? — The 
Dangers  of  too  much  Strictness — Some  Reforms  necessary 
— Publicity,  Education,  Higher  Ideals  the  only  Lasting 
Solution — The  Importance  of  Foreign  Investments — In- 
dustry cannot  take  all  Risks  and  no  Profits. 

EVERY  week — almost  every  day — brings  with  it  the 
announcement  of  some  new  committee  considering 
some  question  that  may,  or  may  not,  arise  now  or 
when  the  war  is  over.  Especially  in  the  realm  of 
finance  has  the  Government's  output  of  committees 
been  notably  prolific  of  late.  We  have  had  a  Com- 
mittee on  Currency,  a  Committee  on  Banking  Amal- 
gamations, and  a  Committee  appointed,  humorously 
enough,  by  the  Ministry  of  Reconstruction  to  consider 
what  measures,  if  any,  should  be  taken  to  protect 
the  public  interest  in  connection  with  the  policy  of 
industrial  combinations; — a  policy  which  the  Board 
of  Trade  has  been  sedulously  fostering.  Now  comes 
a  Committee  to  inquire  "  what  amendments  are 
expedient  in  the  Companies  Acts,  1908-1917, 


92  THE  COMPANIES  ACTS 

principally  having  regard  to  the  circumstances 
arising  out  of  the  war,  and  to  the  developments 
likely  to  arise  on  its  conclusion,  and  to  report  to 
the  Board  of  Trade  and  to  the  Ministry  of  Recon- 
struction." It  is  composed  of  the  Right  Hon.  Lord 
Wrenbury  (chairman),  Mr  A.  S.  Comyns  Carr,  Sir 
F.  Crisp,  Mr  G.  W.  Currie,  M.P.,  Mr  F.  Gaspard 
Fairer,  Mr  Frank  Gore-Browne,  K.C.,  Mr  James 
Martin,  the  Hon.  Algernon  H.  Mills,  Mr  R.  D.  Muir, 
Mr  C.  T.  Needham,  M.P.,  Mr  H.  A.  Payne,  Sir  Owen 
Philipps,  M.P.,  Sir  WiUiam  Plender,  Mr  O.  C. 
Quekett,  and  Mr  A.  W.  Tait.  The  secretary  is  Mr 
W.  W.  Coombs,  55,  Whitehall,  S.W.  i.  There  are 
some  good  names  on  the  Committee.  Mr.  Gaspard 
Farrer  represents  a  great  issuing  house  ;  Sir  Frank 
Crisp,  company  lawyers ;  Sir  William  Plender,  the 
accountants ;  Mr  O.  C.  Quekett,  the  Stock  Ex- 
change ;  and  Sir  Owen  Philipps,  the  shipping 
interest.  Nevertheless,  one  cannot  help  shuddering 
when  one  considers  the  dangers  that  threaten  British 
finance  and  industry  from  ill-considered  measures 
which  might  possibly  be  recommended  by  a  Com- 
mittee influenced  by  the  atmosphere  of  the  present 
outlook  on  financial  and  commercial  affairs. 

One  of  the  interesting  features  of  the  present 
war  atmosphere  is  the  fact  that,  now  when  we  are 
fighting  as  hard  as  we  can  to  defeat  all  that  is  meant 
by  Prussianism  a  great  many  of  our  rulers  and 
public  men  are  doing  their  best  to  impose  Prus- 
sianising methods  upon  this  unfortunate  country, 
merely  because  it  is  generally  assumed  that  Prussian 
methods  have  been  shown,  during  the  course  of  the 


PRUSSIANISING   BRITAIN  93 

war,  to  carry  with  them  a  certain  amount  of  efficiency. 
It  is  certainly  true  that  Prussian  methods  do  very 
well  as  applied  to  the  Prussians  and  submitted  to 
by  other  races  of  Germans.  On  the  other  hand,  it 
is  at  least  open  to  argument  that  the  British  method 
of  freedom,  individual  initiative,  elasticity  and 
adaptability  have  produced  results,  during  the 
present  war,  which  have  so  far  been  paralleled  by 
no  other  country  engaged  in  the  contest.  Working 
on  interior  lines  with  the  assistance  of  docile  and 
entirely  submissive  allies,  Germany  has  certainly 
done  wonderful  things  in  the  war,  but  it  by  no 
means  follows  that  the  verdict  of  posterity  will  not 
give  the  palm  of  achievement  to  England,  who  has 
not  only  carried  out  everything  that  she  promised 
to  do  before  the  war,  but  has  incidentally  and  in 
the  course  of  it  created  and  equipped  an  Army  on 
a  Continental  scale,  and  otherwise  done  very  much 
more  for  the  assistance  of  her  Allies  than  was  con- 
templated before  the  war  began. 

It  is  untrue  to  say  that  we  were  unprepared  for 
the  war.  We  were  more  than  prepared  to  do  all 
that  we  promised  to  do.  What- we  were  unprepared 
for  was  finding  ourselves  required  to  turn  ourselves 
into,  not  only  the  greatest  naval  Power  in  the  world, 
but  one  of  the  greatest  military  Powers  also.  This 
demand  was  sprung  upon  us,  and  we  have  met  it 
with  extraordinary  success.  The  whole  idea  that 
Germany's  achievement  has  been  such  as  to  warrant 
any  attempt  on  our  part  to  model  our  institutions 
on  her  pattern  seems  to  me  to  fall  to  pieces  as  soon 
as  one  looks  calmly  at  the  actual  results  produced  by 


94  THE  COMPANIES  ACTS 

the  different  systems.  Moreover,  even  if  we  were  to 
admit  that  Germany's  achievement  in  the  war  has 
been  immeasurably  greater  than  ours,  it  still  would 
not  follow  that  we  could  improve  matters  here  by 
following  the  German  system.  It  ought  not  to  be 
necessary  to  observe  that  a  system  which  is  good 
for  one  nation  or  individual  is  not  necessarily  good 
for  another.  In  the  simple  matter  of  diet,  for 
instance,  a  most  scientifically  planned  diet  given 
to  a  child  who  does  not  happen  to  like  it  will  not 
do  that  child  any  good.  These  things  ought  to  be 
obvious,  but  unfortunately  in  these  times,  which 
call  for  eminently  practical  thought  and  effort, 
there  is  a  curious  doctrinaire  spirit  abroad,  and  the 
theorist  is  continually  encouraged  to  imagine  how 
much  better  things  would  be  if  everything  were 
quite  different,  whereas  what  we  want  is  the  appli- 
cation of  practical  common  sense  to  practical  facts 
as  they  are. 

In  the  realm  of  finance  the  freedom  and  individual 
initiative  and  elasticity  of  our  English  system  have 
long  been  the  envy  of  the  world.  Our  banking  system, 
as  was  shown  on  an  earlier  page,  has  always  worked 
with  much  less  restriction  on  the  part  of  legislative 
and  official  interference  than  any  other,  and,  with 
the  help  of  this  freedom  from  official  control,  English 
bankers  and  finance  houses  had  made  London  the 
financial  centre  of  the  world  before  the  war.  The 
attempt  of  Parliament  to  control  banking  by  Peel's 
Act  of  1844  was  quietly  set  aside  b}^  the  banking 
machinery  through  the  development  of  the  use  of 
cheques,  which  made  the  regulations  imposed  on  the 


POLITICAL   INFLUENCES  95 

note  issue  a  matter  of  quite  minor  importance,  except 
in  times  of  severe  crisis,  when  these  regulations  could 
always  be  set  aside  by  an  appeal  to  the  Chancellor  of 
the  Exchequer.  There  was  no  Government  inter- 
ference in  the  matter  of  new  issues  of  securities  on 
the  London  Stock  Exchange  or  of  the  quotations 
granted  to  new  securities  by  the  Committee  of  the 
Stock  Exchange.  Now  the  Companies  Acts  are  to 
be  revised  in  view  of  what  may  be  necessary  after 
the  war,  and  there  is  only  too  much  reason  to  fear 
that  mistakes  may  occur  through  the  imposition  of 
drastic  restrictions,  which  look  so  easy  to  work  on 
paper,  but  are  more  than  likely  to  have  the  actual 
effect  of  doing  much  more  harm  than  good. 

"  Circumstances  arising  out  of  the  war  and 
developments  likely  to  arise  on  its  conclusion  "  give 
this  Committee  a  roving  commission  to  consider  all 
kinds  of  things,  which  may  or  may  not  happen,  in 
the  light  of  wisdom  which  may  be  put  before  it  by 
interested  witnesses,  and,  worse  still,  in  the  light  of 
semi-official  pressure  to  produce  a  report  which  will 
go  down  well  with  the  House  of  Commons.  Our 
politicians  are  at  present  in  a  state  of  extreme 
servility  before  the  enterprising  gentlemen  who  are 
now  at  the  head  of  what  is  called  the  Labour  Party. 
Every  one  will  sympathise  with  the  aspirations  of 
this  party  in  so  far  as  they  aim  at  bettering  the  lot 
of  those  who  do  the  hard  and  uninteresting  work  of 
the  world,  and  giving  them  a  larger  share  of  the 
productions  that  they  help  to  turn  out ;  but  that 
is  not  the  same  thing  as  giving  obsequious  attention 
to  the  views  which  their  representatives  may  have 


96  THE  COMPANIES  ACTS 

concerning  the  management  of  financial  affairs,  on 
the  subject  of  which  their  knowledge  is  necessarily 
limited  and  their  outlook  is  likely  to  be,  to  a  certain 
extent,  prejudiced.  A  recent  manifesto  put  forward 
by  the  leaders  of  the  new  Labour  Party  includes  in 
its  programme  the  acquisition  by  the  nation  of  the 
means  of  production — in  other  words,  the  expropria- 
tion of  private  capitalists.  The  Labour  people  very 
probably  think  that  by  this  simple  method  they  will 
be  able  to  save  the  labourer  the  cost  of  providing 
capital  and  the  interest  which  is  paid  for  its  use  ; 
and  people  who  are  actuated  by  this  fallacy,  which 
implies  that  the  rate  paid  to  capital  is  thinly  dis- 
guised robbery,  inevitably  have  warped  views  con- 
cerning the  machinery  of  finance  and  the  earnings 
of  financiers.  These  views,  expressed  in  practical 
legislation,  might  have  the  most  serious  effects  not 
only  upon  England's  financial  supremacy  but  also 
on  the  industrial  activity  which  that  financial  supre- 
macy does  so  much  to  maintain  and  foster. 

What,  after  the  war,  will  be  the  most  important 
need,  from  the  material  point  of  view,  for  the 
inhabitants  of  this  country  ?  However  the  war  may 
end,  and  whatever  may  happen  between  now  and 
the  end  of  it,  there  can  be  only  one  answer  to  this 
question,  and  that  answer  is  greatly  increased 
production.  The  war  has  already  diminished  our 
capital  resources  to  the  extent  of  the  whole  amount 
that  we  have  raised  by  borrowing  abroad,  that  is 
to  say,  by  pledging  the  production  of  our  existing 
capital,  and  by  selling  to  foreign  countries  the  foreign 
securities  in  which  our  capitalists  had  invested 


FREEDOM   NEEDED  97 

during  the  previous  century.     No  one  knows  the 
extent  to  which  our  capital  resources  have  been 
impaired  by  these  two  processes,   but  it  may  be 
guessed  at  as  somewhere  in  the  neighbourhood  of 
1500  millions  ;   that  is  to  say,  about  10  per  cent,  of 
a  liberal  estimate  of  the  total  accumulated  property 
of  the  country  at  the  beginning  of  the  war.     To  this 
direct  diminution  in  our  capital  resources  we  have 
to  add  the  impossibility,  which  has  existed  during 
the  war,  of  maintaining  our  factories  and  industrial 
equipment  in  first-class  working  order  by  expenditure 
on  account  of  depreciation  of  plant.     On  the  other 
side  of  the  balance-sheet  we  can  put  a  large  amount 
of  new  machinery  introduced,  which  may  or  may 
not  be  useful  for  industrial  purposes  after  the  war ; 
greatly  improved  methods  of  organisation,  the  effect 
of  which  may  or  may  not  be  spoilt  when  the  war  is 
over  by  uncomfortable  relations  between  Capital 
and  Labour  ;  and  our  loans  to  Allies  and  Dominions, 
some  of  which  may  have  to  be  written  off,  and  most 
of  which  will  return  us  no  interest  for  some  time  to 
come,  or  will  at  first  pay  us  interest  if  we  lend  our 
debtors   the   money   to   pay   it   with.     What   the 
country  will  need,  above  all,  on  the  material  side, 
is  an  abundant  revenue,  which  can  only  be  produced 
by  vigorous  and  steady  effort  in  industry,  which, 
again,  can  only  be  forthcoming  if  the  machinery  of 
credit  and  finance  is  given  the  fullest  possible  freedom 
to  provide  every  one  who  wants  to  engage  in  industry 
and  increase  the  output  of  the  country  with  the 
financial  facilities,  without  which  nothing  can  be 
done. 


98  THE  COMPANIES  ACTS 

Is  it,  then,  wise  at  such  a  time  to  impose  restric- 
tions by  a  drastic  tightening  up  of  the  Companies 
Act,  upon  those  who  wish  by  financial  activity,  to 
further  the  efforts  of  industries  and  producers  ?  On 
the  contrary,  it  would  seem  to  be  a  time  to  give  the 
greatest  possible  freedom  to  the  financial  machine 
so  that  there  shall  be  the  least  possible  delay  and 
difficulty  in  providing  enterprise  with  the  resources 
that  it  needs.  We  can  only  make  good  the  ravages 
of  war  by  activity  in  production  and  strict  economy 
in  consumption.  What  we  want  to  do  is  to  stimulate 
the  people  of  this  country  to  work  as  hard  as  they 
can,  to  produce  as  much  as  possible,  to  consume  as 
little  as  possible  on  unnecessary  enjoyment  and 
luxury,  and,  so,  by  procuring  a  big  balance  of  pro- 
duction over  consumption,  to  have  the  largest  possible 
volume  of  available  goods  for  sale  to  the  rest  of  the 
world,  in  order  to  rebuild  our  position  as  a  creditor 
country,  which  the  war's  demands  upon  us  have  to 
some  extent  impaired. 

It  is  a  commonplace  that  if  it  had  not  been  for 
the  great  mass  of  foreign  securities,  which  this 
country  held  at  the  beginning  of  the  war,  we  could 
not  nearly  so  easily  have  financed  the  enormous 
amount  of  food  and  munitions  which  we  have  had 
to  provide  for  our  population,  for  our  armies,  and 
for  the  population  and  armies  of  our  Allies.  If, 
instead  of  holding  a  mass  of  easily  marketable 
securities,  we  had  had  to  rely,  in  order  to  pay  for 
our  purchases  of  foreign  goods,  on  the  productions 
of  our  own  mines  and  factories,  and  on  our  power  to 
borrow  abroad,  then  we  should  have  had  to  restrict 


OUR  STRENGTH   AS   CREDITOR         99 

very  greatly  the  number  of  men  we  have  put  into 
the  firing-line  so  as  to  keep  them  at  home  for  pro- 
ductive work,  or,  by  the  enormous  amount  of  our 
borrowings,  we  should  have  cheapened  the  value 
of  British  credit  abroad  to  a  much  greater  extent 
than  has  been  the  case.  Our  position  as  a  great 
creditor  country  was  an  enormously  valuable  asset, 
not  only  during  the  war  but  also  before  it,  both 
from  a  financial  and  industrial  point  of  view.  It 
gave  us  control  of  the  foreign  exchanges  by  enabling 
us,  at  any  time,  to  turn  the  balance  of  trade  in  our 
favour  by  ceasing  for  a  time  to  lend  money  abroad, 
and  calling  upon  foreign  countries  to  pay  us  the  inter- 
due  from  them.  The  financial  connections  which  it 
implied  were  of  the  greatest  possible  assistance  to  us 
in  enhancing  British  prestige,  and  so  helping  our 
industry  and  commerce  to  push  the  wares  that  they 
produced  and  handled. 

Reform  of  the  Companies  Acts  has  often  before 
the  war  been  a  more  or  less  burning  question. 
Whenever  the  public  thought  that  it  had  been 
swindled  by  the  company  promoting  machinery,  it 
used  to  write  letters  to  the  newspapers  and  point 
out  that  it  was  a  scandal  that  the  sharks  of  the  City 
should  be  allowed  to  prey  upon  the  ignorant  public, 
and  that  something  ought  to  be  done  by  Parliament 
to  insure  that  investments  offered  to  the  public 
should  somehow  or  other  be  made  absolutely  water- 
tight and  safe,  while  by  some  unexplained  method 
the  public  would  still  be  somehow  able  to  derive 
large  benefits  from  fortunate  speculations  in  enter- 
prises which  turned  out  right.  Every  one  must 


loo  THE  COMPANIES  ACTS 

admit  there  have  been  some  black  pages  in  the  history 
of  British  company  promoting,  and  that  many 
swindles  have  been  perpetrated  by  which  the  public 
has  lost  its  money  and  dishonest  and  third-rate 
promoters  have  retired  with  the  spoil.  The  question 
is,  however,  what  is  the  remedy  for  this  admitted 
and  glaring  evil  ?  Is  it  to  be  found  by  making  the 
Companies  Laws  so  strict  that  no  respectable  citizen 
would  venture  to  become  a  director  owing  to  the 
fear  of  penal  servitude  if  the  company  on  whose 
board  he  sat  did  not  happen  to  pay  a  dividend,  and 
that  no  prospectus  could  be  issued  except  in  the  case 
of  a  concern  which  had  already  stood  so  severe  a 
test  that  its  earning  capacity  was  placed  beyond 
doubt  ?  It  would  certainly  be  possible  by  legislative 
enactment  to  make  any  security  that  was  offered  as 
safe  as  Consols,  and  less  subject  to  fluctuation  in 
value.  But  when  this  had  been  done  the  effect 
would  be  very  much  like  the  effect  upon  rabbits  of 
the  recent  fixing  of  their  price.  No  more  securities 
would  be  offered. 

It  is  certainly  extremely  important  for  the  future 
financial  and  industrial  development  of  this  country 
that  the  machinery  of  finance  and  company  promotion 
should  be  made  as  clean  as  possible.  What  we  want 
to  do  is  to  make  everybody  see  that  a  great  increase 
in  output  is  required,  that  this  great  increase  in 
output  can  only  be  brought  about  if  there  is  a  great 
increase  in  the  available  amount  of  capital,  that 
capital  can  only  be  brought  into  being  by  being 
saved,  and  that  it  is  therefore  everybody's  business, 
both  for  his  own  sake  and  that  of  the  country,  to 


OPENINGS   FOR 


earn  as  much  as  he  can  and  save  as  much  as  he  can 
so  that  the  country's  capital  fund  can  be  increased  ; 
so  that  industry,  which  will  have  many  difficult 
problems  to  face  when  the  war  is  over,  shall  be  as 
far  as  possible  relieved  from  any  difficulty  of  finding 
all  the  capital  that  it  needs.  To  produce  these 
results  it  is  highly  necessary  to  increase  the  confi- 
dence of  the  public  in  the  machinery  of  the  Stock 
Exchange,  in  company  promotion  and  all  financial 
issues.  Any  one  who  sincerely  believes  that  these 
results  can  be  produced  by  tightening  up  the  Com- 
panies Acts  is  not  only  entitled  but  bound  to  press 
as  hard  as  he  can  for  the  securing  of  this  object. 
But  is  this  the  right  way  to  do  it  ?  There  is  much 
to  be  said  at  first  sight  for  making  more  strict  the 
regulations  under  which  prospectuses  have  to  be 
issued  under  the  Companies  Acts,  demanding  a 
franker  statement  of  the  profits  in  the  past,  a  fuller 
statement  concerning  the  prices  paid  to  vendors, 
and  the  prices  paid  by  vendors  to  sub-vendors,  and 
so  forth.  Any  one  who  sits  down  with  a  pre-war 
industrial  prospectus  in  his  hand  can  find  many 
openings  for  the  hand  of  the  reformer.  The  accounts 
published  by  public  companies  might  also  be  made 
fuller  and  more  informing  with  advantage.  But 
even  if  these  obviously  beneficial  reforms  were 
carried  out,  there  would  always  be  danger  of  their 
evasion.  They  might  tend  to  the  placing  of  securities 
by  hole-and-corner  methods  without  the  issue  of 
prospectuses  at  all,  and  to  all  the  endless  devices 
for  dodging  the  law  which  are  so  readily  provided 
as  soon  as  any  attempt  is  made  by  legislation  to 

H 


102  THE  COMPANIES  ACTS 

go  too  far  ahead  of  public  education  and  public 
feeling. 

This  is  the  real  solution  of  this  problem- 
publicity,  the  education  of  the  public,  and  a  higher 
ideal  among  financiers.  As  long  as  the  public  likes 
to  speculate  and  is  greedy  and  ignorant  enough  to 
be  taken  in  by  the  wiles  of  the  fraudulent  promoter, 
attempts  by  legislation  to  check  this  gentleman's 
enterprise  will  be  defeated  by  his  ingenuity  and  the 
public's  eagerness  to  be  gulled.  The  ignorance  of 
the  public  on  the  subject  of  its  investments  is 
abysmal,  as  anybody  knows  who  is  brought  into 
practical  touch  with  it.  Just  as  the  cure  for  the 
production  of  rotten  and  fraudulent  patent  medicines 
thrust  down  the  public's  throat  by  assiduous  adver- 
tising is  the  education  of  the  public  concerning  the 
things  of  its  stomach,  so  the  real  cure  for  financial 
swindles  is  the  education  of  the  public  concerning 
money  matters,  and  its  recognition  of  the  fact  that 
it  is  impossible  to  make  a  fortune  in  the  City  without 
running  risks  which  involve  the  possible,  not  to  say 
probable,  loss  of  all  the  money  with  which  the 
speculator  starts.  When  once  the  public  has  learnt 
to  distinguish  between  a  speculation  and  an  invest- 
ment, and  has  also  learnt  honesty  enough  to  be  able 
to  know  whether  it  wants  to  speculate  or  invest,  it 
will  have  gone  much  further  towards  checking  the 
activity  of  the  fraudulent  promoter  than  any  measure 
that  can  be  recommended  by  the  most  respectable 
and  industrious  of  committees.  At  the  same  time, 
it  must  be  recognised  by  those  responsible  for  our 
finance,  that  it  is  their  business,  and  their  interest, 


OUR  RULERS1  INTENTIONS          103 

to  keep  the  City's  back  premises  clean ;  because 
insanitary  conditions  in  the  back  yard  raise  a  stink 
which  fouls  the  whole  City. 

In  the  meantime,  if  gossip  is  to  be  believed,  some 
of  the  members  of  the  Government  have  the  most 
disquieting  intentions  concerning  the  kind  of  regula- 
tions which  they  wish  to  impose  on  the  activities  of 
the  City,  especially  in  its  financial  branch.  It  is 
believed  that  some  of  the  bright  young  gentlemen 
who  now  rule  us  are  in  favour  of  Government  control 
over  the  investment  of  money  placed  at  home,  and 
the  prohibition  of  the  issue  of  foreign  securities  ; 
and  it  is  even  whispered  that  a  fantastic  scheme  for 
controlling  the  profits  of  all  industrial  companies,  by 
which  anything  earned  above  a  certain  level  is  to  be 
seized  for  the  benefit  of  the  nation,  is  now  a  fashion- 
able project  in  influential  Parliamentary  circles. 
Every  one  must,  of  course,  admit  that  a  certain 
amount  of  control  will  be  necessary  for  some  time 
after  the  war.  It  may  not  be  possible  at  once  to 
throw  open  the  London  Money  Market  to  all 
borrowers,  leaving  them  and  it  to  decide  between 
them  who  is  to  be  first  favoured  with  a  supply  of 
the  capital  for  which  there  will  be  so  large  a  demand 
when  the  war  is  over.  Certain  industries,  those 
especially  on  which  our  export  trade  depends,  will 
have  to  be  first  served  in  the  matter  of  the  provision 
of  capital.  If  it  is  a  choice  between  the  engineering 
or  shipbuilding  trades  and  a  company  that  wants  to 
start  an  aeroplane  service  between  London  and 
Brighton  for  the  idle  rich,  it  would  not  be  reasonable, 
during  the  first  few  months  after  the  war,  that  the 


io4  THE  COMPANIES  ACTS 

unproductive  project  should  be  able,  by  bidding  a 
high  price  for  capital,  to  forestall  the  demand  of  the 
more  useful  producer.  And  with  regard  to  the  issue 
of  foreign  securities,  there  is  this  to  be  said,  that 
foreign  securities  placed  in  London  have  the  same 
effect  upon  foreign  exchange  as  the  import  into 
England  of  goods  shipped  from  any  country ;  that 
is  to  say,  for  the  time  being  they  turn  the  exchange 
against  us.  On  the  other  hand,  it  is  a  well-known 
commonplace  that  imports  of  securities  have  to  be 
balanced  by  exports  of  goods  or  services ;  and  as 
the  times  when  our  export  trade  is  most  active  are 
those  when  most  foreign  securities  are  being  placed 
in  London,  it  follows  that  any  restrictions  placed 
upon  the  issue  of  foreign  securities  in  London  will 
hinder  rather  than  help  that  recovery  in  our  export 
trade  which  is  so  essential  to  the  restoration  of  our 
position  as  a  creditor  country. 

Moreover,  our  rulers  must  remember  this,  that 
in  war-time,  when  all  the  letters  sent  abroad  are 
subject  to  the  eye  of  the  Censor,  it  is  possible  to 
control  the  export  of  British  funds  abroad ;  but 
that  in  peace  time  (unless  the  censorship  is  to  con- 
tinue), it  will  not  be  possible  to  check  foreign  invest- 
ment by  restricting  the  issuing  of  foreign  securities 
in  London.  If  people  see  better  rates  to  be  earned 
abroad  and  more  favourable  prospects  offered  by 
the  price  of  securities  on  foreign  Stock  Exchanges, 
they  will  invest  abroad,  whether  securities  are  issued 
in  London  or  not.  As  for  the  curious  suggestion 
that  the  profits  of  industrial  companies  are  hence- 
forward to  be  limited  and  the  whole  balance  above 


AN    UNPRINTABLE   ANSWER         105 

a  statutory  rate  to  be  taken  over  by  the  State  for 
the  public  good,  this  would  be,  in  effect,  the  con- 
tinuance on  stricter  lines  of  the  Excess  Profits  Duty. 
As  a  war  measure  the  Excess  Profits  Duty  has  much 
to  be  said  for  it  at  a  time  when  the  Government,  by 
its  inflationary  policy,  is  putting  large  windfalls  of 
profit  into  the  hands  of  most  people  who  have  to  hold 
a  stock  of  goods  and  have  only  to  hold  them  to  see 
them  rise  in  value.  The  argument  that  the  State 
should  take  back  a  large  proportion  of  this  artificially 
produced  profit  is  sound  enough  ;  but,  if  it  is  really 
to  be  the  case  that  industry  is  to  be  asked  for  the 
future  to  take  all  the  risk  of  enterprise  and  hand 
over  all  the  profit  above  a  certain  level  to  the 
Government,  the  reply  of  industry  to  such  a  pro- 
position would  inevitably  be  short,  emphatic,  un- 
printable, and  by  no  means  productive  of  revenue 
to  the  State. 


VIII 

THE  YEAR'S  BALANCE-SHEET 
April,  1918 

The  Figures  of  the  National  Budget — A  Large  Increase  in  Revenue 
and  a  Larger  in  Expenditure — Comparisons  with  Last  Year 
and  with  the  Estimates — The  Proportions  borne  by  Taxa- 
tion still  too  Low — The  Folly  of  our  Policy  of  Incessant 
Borrowing — Its  Injustice  to  the  Fighting  Men. 

AT  first  sight  the  figures  of  revenue  and  expenditure 
for  the  year  ending  March  3ist  are  extremely  satis- 
factory, at  any  rate  on  the  revenue  side.  The 
Chancellor  anticipated  a  year  ago  a  revenue  from 
taxation  and  State  services  of  £638  millions,  and  the 
receipts  into  the  Exchequer  on  these  accounts 
actually  amount  to  £707  millions.  On  the  expendi- 
ture side,  however,  the  increase  over  the  Budget 
estimate  was  very  much  greater.  The  estimate  was 
£2290  millions,  and  the  actual  amount  expended  was 
£2696  millions.  Instead,  therefore,  of  a  deficit  of 
£1652  millions  having  to  be  met  by  borrowing,  there 
was  an  actual  gap,  to  be  filled  by  this  method,  of, 
roughly,  £1990  millions. 

To  take  the  revenue  side  of  the  matter  first,  this 
being  by  far  the  most  cheering  and  satisfactory,  we 
find  that  the  details  of  the  revenue,  as  compared 
with  last  year's,  were  as  follows  : — 


COMPARATIVE  FIGURES 


107 


Year  ending 
Mar.  31,  1918. 

Customs       ....  71,261,000 

Excise 38,772,000 

Estate,  etc.,  Duties      .  31,674,000 

Stamps 8,300,000 

Land  Tax     ....  665,000 
House  Duty.     .     .     .  1,960,000 
Income  Tax  and  Super- 
Tax     239,509,000 

Excess   Profits   Duties, 

etc 220,214,000 

Land  Value  Duties       .  685,000 

Postal  Service    .     .     .  35,300,000 

Crown  Lands     .     .     .  690,000 

Sundry  Loans,  etc.       .  6,056,250 

Miscellaneous     .     .      .  52,148,315 


Year  ending 
Mar.  31,  1917. 

70,561,000 
56,380,000 
31,232,000 
7,878,000 
640,000 
1,940,000 

Increase. 
£ 
700,000 

442,000 
422,000 
25,000 
20,000 

Decrease. 
£ 

17,608,000 

205,033,000     34,476,000 


139,920,000 

521,000 

34,100,000 

650,000 

8,055,817 

16,516,765 


go,  294,000 
164,000 

1,200,000 
4.O,OOO 

35,631,550 


1,999,567 


707,234,565         573,427,582 


153,414,550,       19,607,567 

-~-^    '    — 

5,806,983 

Increase: 


£133,806,983 

Net  " 


A  more  interesting  comparison  perhaps  is  to 
take  the  actual  receipts  during  the  past  financial 
year  and  compare  them,  not  with  the  former  year, 
but  with  the  estimates  of  the  expected  yield  of  the 
various  items.  In  this  case  we  get  the  following 
comparisons  : — 


Customs 

Excise    .... 

Estate  Duties 

Stamps 

Land  Tax  and  House 

Duty        .      .      . 
Income    Tax    and 

Super  Tax     . 
Excess  Profits  Tax 
Land  Value  Duties 
Postal  Services 
Crown  Lands    . 
Sundry  Loans,  etc. 
Miscellaneous   . 


Actual. 

71,261,000 

38,772,000 

31,674,000 

8,300,000 

2,625,000 


239,509,000 
220,214,000 
685,000 

35,300,000 
690,000 
6,056,000 
52,148,000 


Estimated. 

£ 

70,750,000 
34,950,000 
29,000,000 

8,000,000 

2,600,000 

224,000,000 

200,000,000 

400,000 

33,700,000 

600,000 

7,500,000 

27,100,000 


Difference. 

£ 

+  511,000 
-f-  3,822,000 
-j-  2,674,000 
4-  300,000 

-f-    25,000 


+20,214,000 
-j-  285,000 
4-  1,600,000 
-j-  90,000 
+  1,444,000 
+  25,048,000 


Certainly,  the  country  is  entitled  to  congratulate 
itself  on  this  tremendous  evidence  of  elasticity  of 


io8        THE   YEAR'S   BALANCE-SHEET 

revenue,  and  to  a  certain  extent  on  the  effort  that 
it  has  made  in  providing  this  enormous  sum  of  money 
from  the  proceeds  of  taxation  and  State  services. 
But  when  this  much  has  been  admitted  we  have  to 
hasten  to  add  that  the  figures  are  not  nearly  so  big 
as  they  look,  and  that  there  is  much  less  "  to  write 
home  about,"  as  the  schoolboy  said,  than  there 
appears  to  be  at  first  sight.  Those  champions  of 
the  Government  methods  of  war  finance  who  main- 
tain that  we  have,  during  the  past  year,  multiplied 
the  pre-war  revenue,  of  roughly,  £200  millions  by 
more  than  3^,  so  arriving  at  the  present  revenue  of 
over  £700  millions,  are  not  comparing  like  with  like. 
The  statement  is  perfectly  true  on  paper,  and  ex- 
pressed in  pounds  sterling,  but  then  the  pound  ster- 
ling of  to-day  is  an  entirely  different 'article  from  the 
pre-war  pound  sterling.  Owing  to  the  system  of 
finance  pursued  by  our  Government,  and  by  every 
other  Government  now  engaged  in  the  war,  of  pro- 
viding for  a  large  part  of  the  country's  goods  by 
the  mere  manufacture  of  new  currency  and  credit, 
the  buying  power  of  the  pound  sterling  has  been 
greatly  depreciated.  By  multiplying  the  amount  of 
legal  tender  currency  in  the  shape  of  Treasury  notes, 
of  token  currency  in  the  shape  of  silver  and  bronze 
coinage,  and  of  banking  currency  through  the  bank 
deposits  which  are  swollen  by  the  banks'  investments 
in  Government  securities,  the  Government  has 
increased  the  amount  of  currency  passing  from  hand 
to  hand  in  the  community  while,  at  the  same  time, 
the  volume  of  goods  to  be  purchased  has  not  been 
increased  with  anything  like  the  same  rapidity,  and 


DEPRECIATED  MONEY  109 

may,  in  fact,  have  been  actually  decreased.  The 
inevitable  result  has  been  a  great  flood  of  new  money 
with  a  greatly  depreciated  value.  Index  numbers 
show  a  rise  of  over  100  per  cent,  in  the  average  prices 
of  commodities  during  the  war.  It  is,  however, 
perhaps  unfair  to  assume  that  the  buying  power  of 
the  pound  has  actually  been  reduced  by  a  half,  but 
it  is  certainly  safe  to  say  that  it  has  been  reduced 
by  a  third.  Therefore,  the  revenue  raised  by  the 
Government  during  the  past  year  has  to  be  reduced 
by  at  least  a  third  before  we  are  justified  in  com- 
paring our  war  achievements  with  the  Government's 
pre-war  revenue.  If  we  take  one-third  off  £707 
millions  it  reduces  the  total  raised  during  the  past 
year  by  revenue  to  about  £470  millions,  less  than  two 
and  a  half  times  the  pre-war  revenue. 

From  another  point  of  view  our  satisfaction  with 
the  tremendous  figures  of  the  past  year's  revenue 
has  to  be  to  some  extent  qualified.  The  great 
elasticity  shown  by  the  big  increase  of  actual  achieve- 
ment over  the  Budget  estimate  has  been  almost 
entirely  in  revenue  items  which  cannot  be  expected 
to  continue  to  serve  us  when  the  war  is  over.  The 
total  increase  in  the  receipts  over  estimate  amounts 
to  £69  millions,  and  of  this  £20  millions  was  provided 
by  the  Excess  Profits  Duty,  a  fiscal  weapon  which 
was  invented  during  the  war,  and  for  the  purpose 
of  the  war.  It  has  always  been  assumed  that  it 
would  be  discontinued  as  soon  as  the  war  was  over, 
and  if  it  should  not  be  discontinued  its  after-war 
effect  is  likely  to  be  very  unfortunate  at  a  time  when 
our  industrial  effort  requires  all  the  encouragement 


no        THE  YEAR'S  BALANCE-SHEET 

that  it  can  get.  Another  £25  millions  was  provided 
by  miscellaneous  revenue,  and  this  windfall  again 
must  be  largely  due  to  operations  connected  with  the 
war.  Finally,  the  £15 \  millions  by  which  the  income 
tax  exceeded  the  estimate  must  again  be  largely  due 
to  inflation  and  extravagance  on  the  part  of  the 
Government,  which,  by  manufacturing  money,  and 
then  spending  it  recklessly,  puts  big  profits  and  big 
incomes  into  the  hands  of  those  who  have  stocks  of 
goods  to  sell  or  who  are  in  a  position  to  produce 
them. 

If,  therefore,  the  satisfaction  with  which  we  regard 
the  big  total  of  the  Government's  revenue  receipts 
has  to  be  considerably  modified  in  the  cold  light  of 
close  observation,  the  enormous  increase  on  the 
expenditure  side  gives  us  very  little  comfort  and 
calls  for  the  most  determined  and  continued  criticism 
if  our  reckless  Government  is  to  be  made  to  turn  over 
a  new  leaf.  In  the  early  days  of  the  war  there  was 
much  excuse  for  wasting  money.  We  had  to  im- 
provise a  great  Army,  and  a  great  organisation  for 
equipping  it ;  there  was  no  time  then  to  look  too 
closely  into  the  way  the  money  was  being  spent,  but 
this  excuse  is  long  obsolete.  It  is  not  possible  to 
waste  money  without  also  wasting  the  energy  and 
working  power  of  the  nation ;  on  this  energy  and 
working  power  the  staying  power  of  the  country 
depends  in  its  struggle  to  avert  the  greatest  disaster 
that  can  be  imagined  for  civilisation,  that  is,  the 
victory  of  the  German  military  power.  Seeing  that 
for  many  months  past  we  have  no  longer  been, 
obliged  to  finance  Russia,  and  to  provide  Russia 


A  SERIOUS  BLOT  in 

with  the  mass  of  materials  and  the  equipment  that 
she  required,  the  way  in  which  our  expenditure  has 
mounted  up  during  the  course  of  the  year  is  a  very 
serious  blot  on  the  year's  balance-sheet.  We  spent 
during  the  year  ending  March  3ist,  £2696  millions 
against  £2198  millions  in  the  previous  year,  an 
increase  of  close  upon  £500  millions  ;  £63  millions  of 
this  increase  were  due  to  interest  on  war  debt,  the 
rest  of  it  was  due  to  increased  cost  of  the  war,  and 
few  business  men  will  deny  that  very  many  of  these 
extra  millions  might  have  been  saved  if  our  rulers 
and  our  bureaucratic  tyrants  had  been  imbued  with 
any  real  sense  of  the  need  for  conserving  the  energy 
of  the  nation. 

Much  has  been  done  by  the  Committee  on 
National  Expenditure  to  bring  home  to  the  Govern- 
ment opportunities  for  economy,  and  methods  by 
which  it  can  be  secured.  Can  we  be  equally  confident 
that  much  has  been  done  by  the  Government  to 
carry  out  the  advice  that  has  been  given  by  this 
Committee  ?  The  Treasury  is  frequently  blamed  for 
its  inability  to  check  the  rapacity  and  extravagance 
of  the  spending  Departments.  It  is  very  likely 
that  the  Treasury  might  have  done  more  if  it  had 
not  been  led  by  its  own  desire  for  a  short-sighted 
economy  into  economising  on  its  own  staff,  the 
activity  and  efficiency  of  which  was  so  absolutely 
essential  to  the  proper  spending  of  the  nation's 
money.  But  when  this  has  been  admitted,  the  fact 
remains  that  the  Treasury  cannot,  or  can  only  with 
great  difficulty,  be  stronger  on  the  side  of  economy 
than  the  Chancellor  of  the  Exchequer,  and  that  the 


H2        THE  YEAR'S  BALANCE-SHEET 

task  of  the  Chancellor  of  the  Exchequer  of  imposing 
economy  on  a  spendthrift  War  Cabinet  is  one  of 
extreme  difficulty.  I  hope  it  is  not  necessary  to  say 
that  I  do  not  urge  economy  from  any  sordid  desire 
to  save  the  nation's  money  if,  by  its  spending, 
victory  could  be  secured  or  brought  a  day  nearer. 
I  only  urge  it  because  I  believe  that  the  conservation 
of  our  resources  is  absolutely  necessary  to  maintain 
our  staying  power,  and  that  these  resources  are  at 
present  being  scandalously  wasted  by  the  Govern- 
ment. Inter-departmental  competition  is  still  com- 
plained of  in  the  latest  report  of  the  National  Com- 
mittee on  Expenditure,  and  there  seems  to  be  still 
very  little  evidence  that  the  Government  Depart- 
ments have  yet  possessed  themselves  of  the  simple 
fact  that  it  is  only  out  of  these  resources  that  victory 
can  be  secured,  and  that  any  waste  of  them  is  there- 
fore a  crime  against  the  cause  of  liberty  and  progress. 
It  is  possible  that  before  these  lines  are  in  print 
the  Chancellor  will  have  brought  in  his  new  Budget, 
and  therefore  any  attempt  to  forecast  the  measures 
by  which  he  will  meet  next  year's  revenue  would 
be  even  more  futile  than  most  other  endeavours  at 
prophecy.  But  from  the  figures  of  last  year  as 
they  are  before  us  we  see  once  more  that  the  pro- 
portion of  expenditure  raised  by  revenue  still  leaves 
very  much  to  be  desired ;  £707  millions  out  of, 
roughly,  £2700  millions  is  not  nearly  enough.  It  is 
true  that  on  the  expenditure  side  large  sums  have 
been  put  into  assets  which  may  some  day  or  other 
be  recoverable,  and  it  is  therefore  impossible  to 
assume  with  any  approach  to  accuracy  what  the 


THE  ELUSIVE   COST  113 

actual  cost  of  the  war  has  been  for  us  during  the 
past  year.  We  have  made,  for  instance,  very  large 
advances  to  our  Allies  and  Dominions,  and  it  need 
not  be  said  that  our  advances  to  our  own  Dominions 
may  be  regarded  as  quite  as  good  as  if  they  were 
still  in  our  own  pockets ;  but  in  the  case  of  our 
Allies,  our  loans  to  Russia  are  a  somewhat  question- 
able asset,  and  our  loans  to  our  other  brothers-in- 
arms cannot  be  regarded  as  likely  to  be  recoverable 
for  some  time  to  come,  owing  to  the  severity  with 
which  the  war's  pressure  has  been  laid  upon  them. 
With  regard  to  the  other  assets  in  which  the  Govern- 
ment has  invested  our  money,  such  as  factories, 
machinery,  ships,  supplies  and  food,  etc.,  it  is  at 
least  possible  that  considerable  loss  may  be  involved 
in  the  realisation  of  some  of  them.  It  is,  however, 
possible  that  the  actual  cost  of  the  war  to  us  during 
the  year  that  is  past  may  turn  out  some  day  to 
have  been  in  the  neighbourhood  of  £2000  millions. 
If,  on  the  other  hand,  we  deduct  from  the  £700 
millions  raised  by  revenue  the  £200  millions  which 
represent  the  normal  pre-war  cost  of  Government  to 
this  country  we  find  that  the  proportion  of  war's 
cost  raised  out  of  revenue  is  slightly  over  25  per  cent. 
This  proportion  must  be  taken  with  all  reserve  for 
the  reasons  given  above,  but  in  any  case  it  is  very 
far  below  the  47  per  cent,  of  the  war's  cost  raised 
out  of  revenue  by  our  ancestors  in  the  course  of  the 
Napoleonic  wars. 

It  seems  to  me  that  this  policy  of  raising  so  large 
a  proportion  of  the  war's  cost  by  borrowing  is  one 
that  commends  itself  to  short-sighted  politicians, 


H4       THE  YEAR'S  BALANCE-SHEET 

but  is  by  no  means  in  the  interests  of  the  country  as 
a  whole,  or  of  the  taxpayers  who  now  and  hereafter 
have  to  find  the  money  for  paying  for  the  war.  In 
so  far  as  the  war's  needs  have  to  be  met  abroad, 
borrowing  abroad  is  to  some  extent  inevitable  if  the 
borrowing  nation  has  not  the  necessary  resources 
and  labour  available  to  turn  out  goods  for  export 
to  exchange  against  those  which  have  to  be  pur- 
chased abroad,  but  in  so  far  as  the  war's  needs  are 
financed  at  home,  the  policy  of  borrowing  is  one 
that  should  only  be  used  within  the  narrowest 
possible  limits.  By  its  means  the  Government, 
instead  of  making  the  citizens  pay  by  taxation  for 
the  war  as  it  goes  on,  hires  a  certain  number  of 
them  to  pay  for  it  by  promising  them  a  rate  of 
interest,  and  their  money  back  some  day.  The 
interest  and  the  sinking  fund  for  redemption  have 
to  be  found  by  taxation,  and  so  the  borrowing  pro- 
cess merely  postpones  taxation  from  the  war  period 
to  the  peace  period.  During  the  war  period  taxation 
can  be  raised  comparatively  easily  owing  to  the 
patriotic  stimulus  and  the  simplification  of  the 
industrial  problem  which  is  provided  by  the  Govern- 
ment's insatiable  demand  for  commodities.  When 
the  days  of  peace  return,  however,  there  will  be  very 
grave  disturbance  and  dislocation  in  industry,  and 
it  will  have  once  more  to  face  the  problem  of  pro- 
viding goods,  not  for  a  Government  which  will  take 
all  that  it  can  get,  but  for  a  public,  the  demands  of 
which  "will  be  uncertain,  and  whose  buying  power 
will  be  unevenly  distributed,  and  difficult  to  calcu- 
late. The  process,  therefore,  which  postpones  taxa- 


THE  AFTER- WAR  BUDGET  115 

tion  during  the  war  period  to  the  peace  period  seems 
to  be  extraordinarily  short-sighted  from  the  point  of 
view  of  the  nation's  economic  progress.  Recovery 
after  the  war  may  be  astonishingly  rapid  if  all 
goes  well,  but  this  can  only  happen  if  every  oppor- 
tunity is  given  to  industry  to  get  back  to  peace  work 
with  the  least  possible  friction,  and  a  heavy  burden 
of  after-war  taxation,  such  as  we  shall  inevitably 
have  to  face  if  our  Chancellors  of  the  Exchequer 
continue  to  pile  up  the  debt  charge  as  they  have  done 
in  the  past,  will  be  anything  but  helpful  to  those 
whose  business  it  will  be  to  set  the  machinery  of 
industry  going  under  peace  conditions. 

As  things  are,  if  we  continue  to  add  anything 
like  £2000  millions  a  year  to  the  National  Debt,  it 
will  not  be  possible  to  balance  the  after-war  Budget 
without  taxation  on  a  heavier  scale  than  is  now 
imposed,  or  without  retaining  the  Excess  Profit 
Duty,  and  so  stifling  industry  at  a  time  when  it  will 
need  all  the  fresh  air  that  it  can  get.  Apart  from 
this  expedient,  which  would  seem  to  be  disastrous 
from  the  point  of  view  of  its  effect  upon  fresh  in- 
dustry, the  most  widely  advertised  alternative  is  the 
capital  levy,  the  objections  to  which  are  patent  to  all 
business  men.  It  would  involve  an  enormously 
costly  and  tedious  process  of  valuation,  its  yield 
would  be  problematical,  and  it  might  easily  deal  a 
blow  at  the  incentive  to  save  on  which  the  supply 
of  capital  after  the  war  entirely  depends.  A  much 
higher  rate  of  income  tax,  especially  on  large 
incomes,  is  another  solution  of  the  problem,  and 
it  also  might  obviously  have  most  unfortunate 


n6       THE   YEAR'S  BALANCE-SHEET 

effects  upon  the  elasticity  of  industry.  A  tax  on 
retail-  purchases  has  much  to  be  said  in  its  favour, 
but  against  it  is  the  inequity  inseparable  from  the 
impossibility  of  graduating  it  according  to  the  ability 
of  the  taxpayer  to  bear  the  burden ;  and  a  general 
tariff  on  imported  goods,  though  it  would  be  wel- 
comed by  the  many  Protectionists  in  our  midst,  can 
hardly  be  considered  as  a  practical  fiscal  weapon  at 
a  time  when  the  need  for  food,  raw  material,  and  all 
the  equipment  of  industry  will  make  it  necessary 
to  import  as  rapidly  and  as  cheaply  as  possible  in 
order  to  promote  our  after-war  recovery. 

Apart  from  these  purely  economic  arguments 
against  the  high  proportion  of  the  war's  costs  that 
we  are  meeting  by  borrowing,  there  is  the  much 
more  important  fact  of  its  bad  effect  on  the  minds 
of  our  soldiers,  and  of  those  members  of  the  civilian 
'population  who  draw  mistaken  inferences  from  its 
effects.  From  the  point  of  view  of  our  soldiers,  who 
have  to  go  and  fight  for  their  country  at  a  time  when 
those  who  are  left  at  home  are  earning  high  wages 
and  making  big  profits,  it  is  evidently  highly  unfair 
that  the  war  should  be  financed  by  a  method  which 
postpones  taxation.  The  civilian  population  left  at 
home,  earning  high  profits  and  high  wages,  should 
clearly  pay  as  much  as  possible  during  the  war  by 
immediate  taxation,  so  that  the  burden  of  taxation 
may  be  relieved  for  our  soldiers  when  they  return 
to  civil  life.  In  view  of  the  hardships  and  dangers 
which  our  soldiers  have  to  face,  and  the  heroism 
with  which  they  are  facing  them,  this  argument 
should  be  of  overwhelming  strength  in  the  eyes  of 


THE    EVILS    OF   BORROWING        117 

every  citizen  who  has  imagination  enough  to  con- 
ceive what  our  fighting  men  are  doing  for  us  and 
how  supreme  is  our  duty  to  do  everything  to  relieve 
them  from  any  other  burden  except  those  which  the 
war  compels  them  to  face.  There  is  also  the  fact 
that  many  members  of  our  uninstructed  industrial 
population  believe  that  the  richer  classes  are  growing 
richer  owing  to  the  war,  and  battening  on  the  pro- 
ceeds of  the  loans.  I  do  not  think  that  this  is  true  ; 
on  the  contrary,  I  believe  that  the  war  has  brought 
a  considerable  shifting  of  buying  power  from  the 
well-to-do  classes  to  the  manual  workers.  Never- 
theless, in  these  times  misconceptions  are  awkwardly 
active  for  evil.  The  well-to-do  classes  as  a  whole 
are  not  really  benefited  by  having  their  future 
incomes  pledged  in  order  to  meet  the  future  debt 
charge,  and  if,  at  the  same  time,  they  are  believed 
to  be  acquiring  the  right  to  wealth,  which  wealth 
they  will  have  themselves  to  provide,  the  fatuity  of 
the  borrowing  policy  becomes  more  manifest.  For 
these  reasons  it  is  sincerely  to  be  hoped  that  our 
next  fiscal  year  will  be  marked  by  a  much  higher 
revenue  from  taxation,  a  considerable  decrease  in 
expenditure,  and  a  consequently  great  improvement 
in  the  proportion  of  war's  cost  met  out  of  revenue, 
on  what  has  been  done  in  the  past  year.  At  our 
present  rate  of  taxation  we  are  not  nearly  meeting, 
out  of  permanent  taxes,  the  sum  which  will  be 
needed  when  the  war  is  over  for  peace  expenditure 
on  the  inevitably  higher  scale,  pensions,  and  interest 
and  sinking  fund  on  war  debt. 


IX 

COMPARATIVE    WAR    FINANCE 

May,  1918 

The  New  Budget — Our  own  and  Germany's  Balance-sheets — 
The  Enemy's  Difficulties — Mr  Bonar  Law's  Optimism — 
Special  Advantages  which  Peace  will  bring  to  Germany — 
A  Comparison  with  American  Finance — How  much  have 
we  raised  from  Revenue  ? — The  Value  of  the  Pound  To-day 
— The  1918  Budget  an  Improvement  on  its  Predecessors — 
But  Direct  Taxation  still  too  Low — Deductions  from  the 
Chancellor's  Estimates. 

ONE  of  the  most  interesting  passages  in  a  Budget 
speech  of  unusual  interest  was  that  in  which  the 
Chancellor  of  the  Exchequer  compared  the  financial 
methods  of  Germany  and  of  this  country,  as  shown 
by  their  systems  of  war  finance.  He  began  by 
admitting  that  it  is  difficult  to  make  any  accurate 
calculation  on  this  subject,  owing  to  the  very  thick 
mist  of  obscurity  which  envelops  Germany's  actual 
performance  in  the  matter  of  finance  since  the  war 
began.  As  the  Chancellor  says,  our  figures  through- 
out have  been  presented  with  the  object  of  showing 
quite  clearly  what  is  our  financial  position.  Most  of 
the  people  who  are  obliged  to  study  the  figures  of 
Government  finance  would  feel  inclined  to  reply  that, 
if  this  is  really  so,  the  Chancellor  and  the  Treasury 
seem  to  have  curiously  narrow  limitations  in  their 
capacity  for  clearness.  Very  few  accountants,  I 


THE  GERMAN  FIGURES  119 

imagine,  consider  the  official  figures,  as  periodically 
published,  as  models  of  lucidity.  Nevertheless,  we 
can  at  least  Claim  that  in  this  respect  the  figures 
furnished  to  us  by  the  Government  during  the  war 
have  been  quite  as  lucid  as  those  which  used  to  be 
presented  in  time  of  peace,  and  it  is  greatly  to  the 
credit  of  the  Treasury  that,  in  spite  of  the  enormous 
figures  now  involved  by  Government  expenditure, 
the  financial  statements  have  been  published  week 
by  week,  quarter  by  quarter,  and  year  by  year,  with 
the  same  promptitude  and  punctuality  that  marked 
their  appearance  in  peace-tune.  In  Germany,  the 
Chancellor  says,  it  has  not  been  the  object  of  German 
financial  statements  to  show  the  financial  position 
quite  clearly.  It  is,  therefore,  difficult  to  make  an 
exact  statement,  but  he  was  able  to  provide  the 
House  with  a  series  of  very  interesting  figures,  taken 
from  the  statements  of  the  German  Finance  Ministers 
themselves. 

His  first  point  is  with  regard  to  the  increase  of 
expenditure.  The  alarming  rate  with  which  our 
expenditure  has  so  steadily  grown  appears  to  be 
paralleled  also  in  Germany.  Up  to  June,  1916, 
Germany's  monthly  expenditure  was  £100  millions. 
It  has  now  risen  to  over  £187  millions.  That  means 
to  say  that  their  expenditure  per  diem  is  £6J  millions, 
almost  the  same  as  ours,  although  our  expenditure 
includes  items  such  as  separation  allowances  and 
other  matters  of  that  kind,  borne  by  the  States  and 
municipalities  in  Germany,  and  so  not  appearing  in 
the  German  imperial  figures. 

As  to  the  precise  extent  of  the  German  war  debt, 


120       COMPARATIVE  WAR  FINANCE 

there  is  no  certainty,  but  the  Chancellor  was  able 
to  tell  the  House  that  the  last  German  Vote  of 
Credit,  which  was  estimated  to  carry  them  on  to 
June  or  July,  brings  the  total  amount  of  all  their 
Votes  of  Credit  to  £6200  millions,  and  that  it  is  at 
least  certain  that  that  amount  has  been  added  to 
their  War  Debt,  because  their  taxation  during  the 
war  has  not  covered  peace  expenditure  plus  debt 
charge.     Up  to  1916  they  imposed  no  new  taxation. 
In  1916  they  imposed  a  war  increment  tax,  some- 
thing in  the  nature  of  a  capital  levy,  which  is  stated 
to  have  brought  in  £275  millions.     They  added  also 
that  year  £25  millions  nominally  to  their  permanent 
revenue.     In    1917    they    added   in    addition   £40 
millions  to  their  permanent  revenue.     "  Assuming, 
therefore,  that  their  estimates  were  realised,   the 
total  amount  of  new  taxation  levied  by  them  since 
the  beginning  of  the  war  comes  to  £365  millions, 
as  against  our  £1044  millions.     This  £365  millions 
is  not  enough  to  pay  the  interest  upon  the  War 
Debt  which  had  been  accumulated  up  to  the  end  of 
the  year." 

Mr  Bonar  Law  then  proceeded  to  give  an 
estimate  of  what  the  German  balance-sheet  will  be 
a  year  hence  on  the  same  basis  on  which  he  had 
calculated  ours.  With  regard  to  our  position,  he 
had  calculated  that  on  the  present  basis  of  taxation 
we  shall  have  a  margin  of  four  millions  at  the  end 
of  the  present  year  if  peace  should  then  break  out. 
As  will  be  shown  later,  this  estimate  of  his  is  some- 
what optimistic,  but  at  any  rate  our  position,  com- 
pared with  that  of  Germany,  may  be  described  as 


GERMANY'S  DEFICIT  121 

on  velvet.  A  year  hence  the  German  War  Debt  will 
be  not  less  than  £8000  millions.  The  interest  on  that 
will  be  at  least  £400  millions,  a  sinking  fund  at 
|  per  cent,  will  be  £40  millions.  Their  pension 
engagements,  which  will  be  much  higher  than  ours 
owing  to  their  far  heavier  casualties,  have  been 
estimated  at  amounts  ranging  as  high  as  £200 
millions.  The  Chancellor  was  sure  that  he  was 
within  the  mark  in  saying  that  it  will  be  at  least 
£150  millions.  Their  normal  pre-war  expenditure 
was  £130  millions,  so  that  they  will  have  to  face 
a  total  expenditure  at  the  end  of  the  war  of  £720 
millions.  On  the  other  side  of  the  account  their 
pre-war  revenue  was  £150  millions.  They  have 
announced  their  intention  of  this  year  raising 
additional  permanent  Imperial  revenue  amounting 
to  £120  millions.  From  the  nature  of  the  taxes  the 
Chancellor  considers  it  very  difficult  to  believe  that 
this  amount  will  be  realised,  but,  assuming  that  it 
is,  it  will  make  their  total  additional  revenue  £185 
millions.  That,  added  to  the  pre-war  revenue,  gives 
a  total  of  £335  millions,  showing  "  a  deficit  at  the 
end  of  this  year,  comparing  the  revenue  with  the 
expenditure,  of  £385  millions  at  least."  The  Chan- 
cellor added  that  if  that  were  our  position  he  would 
certainly  think  that  bankruptcy  was  not  far  from 
the  British  Government. 

Another  point  that  the  Chancellor  was  able  to 
make  effectively,  in  comparing  our  war  revenue  with 
Germany's,  was  the  fact  that,  with  the  exception 
of  the  war  increment  tax,  scarcely  any  of  the  addi- 
tional revenue  has  been  obtained  from  the  wealthier 


122        COMPARATIVE  WAR  FINANCE 

classes  in  Germany.  Taxation  has  been  indirect  and 
on  commodities  which  are  paid  for  by  the  masses  of 
the  people.  "  The  lesson  to  be  drawn  from  these 
facts  is  not  difficult  to  see.  The  rulers  of  Germany, 
in  spite  of  their  hopes  of  indemnity,  must  realise 
that  financial  stability  is  one  of  the  elements  of 
national  strength.  They  have  not  added  to  their 
financial  stability."  The  reason  for  this  failure  the 
Chancellor  considers  to  be  largely  psychological.  It 
is,  in  the  first  place,  because  they  do  not  care  to  add 
to  discontent  by  increased  taxation  all  over  the 
country,  but  "it  is  still  more  due  to  this,  that  in 
Germany  the  classes  which  have  any  influence  on  or 
control  of  the  Government  are  the  wealthier  classes, 
and  the  Government  have  been  absolutely  afraid  to 
force  taxation  upon  them." 

It  is  certainly  very  pleasant  to  be  able  to  con- 
template the  financial  blunders  by  which  Germany 
is  so  greatly  increasing  the  difficulties  that  it  will 
have  to  face  before  the  war  is  over.  On  the  other 
hand,  we  have  to  recognise  that  the  Chancellor,  with 
that  incorrigible  optimism  of  his,  has  committed  the 
common  but  serious  error  of  over-stating  his  case 
by  leaving  out  factors  which  are  in  Germany's 
favour,  as,  for  instance,  that  Germany's  debt  is  to  a 
larger  extent  than  ours  held  at  home.  Since  the 
war  began  we  have  raised  over  £1000  millions  by 
borrowing  abroad.  Our  public  accounts  show  that 
the  item  of  "  Other  Debt,"  which  is  generally 
believed  to  refer  to  debt  raised  abroad,  now  amounts 
to  £958  millions,  while  one  of  our  loans  in  America, 
which  is  separately  stated  in  the  account  because 


OUR   FOREIGN  DEBT  123 

it  was  raised  under  a  special  Act,  amounted  to  £51  £ 
millions.  It  is  also  quite  possible  that  fair  amounts 
of  our  Treasury  bills,  perhaps  also  of  our  Temporary 
Advances  and  of  our  other  war  securities,  have  been 
taken  up  by  foreigners  ;  but  quite  apart  from  that 
the  two  items  already  referred  to  now  amount  to 
more  than  £1000  millions,  though  at  the  end  of 
March  last  their  amount  was  only  £988  millions.  It 
is  also  well  known  that  we  have  during  the  course 
of  the  war  realised  abroad  the  cream  of  our  foreign 
investments,  American  Railroad  Bonds,  Municipal 
and  Government  holdings  in  Scandinavia,  Argentina, 
and  elsewhere,  to  an  amount  concerning  which  no 
accurate  estimate  can  be  made,  except  by  those  who 
have  access  to  the  Arcana  of  the  Treasury.  It  may, 
however,  be  taken  as  roughly  true  that  so  far  the 
extent  of  our  total  borrowings  and  realisation  of 
securities  abroad  has  been  balanced  by  our  loans  to 
our  Allies  and  Dominions,  which  amounted  at  the 
end  of  March  last  to  £1526  millions.  We  have  thus 
entered  into  an  enormous  liability  on  foreign  debts 
and  sold  a  batch  of  very  excellent  securities  on 
which  we  used  to  receive  interest  from  abroad  in 
the  shape  of  goods  and  services,  against  which  we 
now  hold  claims  upon  our  Allies  and  Dominions,  in 
respect  to  the  greater  part  of  which  it  would  be 
absurd  to  pretend  that  we  can  rely  on  receiving 
interest  for  some  years  after  the  war,  in  view  of  the 
much  greater  economic  strain  imposed  by  the  war 
upon  our  Allies. 

Germany,  of  course,  has  been  doing  these  things 
also*     Germany    has    parted    with    her    foreign 


I24        COMPARATIVE  WAR  FINANCE 

securities.  She  was  selling  them  in  blocks  for  some 
weeks  before  the  war,  and  Germany,  of  course,  has 
done  everything  that  she  could  in  order  to  induce 
neutrals,  during  the  course  of  the  war,  to  buy  securities 
from  her  and  to  subscribe  to  her  War  Loans.  Never- 
theless, it  cannot  have  been  possible  for  Germany 
to  carry  out  these  operations  to  anything  like  the 
extent  that  we  have,  partly  because  her  credit  has 
not  been  nearly  so  good,  partly  because  her  ruthless 
and  brutal  conduct  of  the  war  has  turned  the  senti- 
ment of  the  world  against  her,  and  partly  because 
the  measures  that  we  have  taken  to  check  remit- 
tances and  transfers  of  money  have  not  been  alto- 
gether ineffective.  On  this  side  of  the  problem 
Germany  has  therefore  an  advantage  over  us,  that 
her  war  finance,  pitiful  as  it  has  been,  has,  not 
owing  to  any  virtue  of  hers,  but  owing  to  force  of 
circumstances,  raised  her  a  problem  which  is  to  a 
great  extent  internal,  and  will  not  have  altered  her 
relation  to  the  finance  of  other  countries  so  much 
as  has  been  the  case  with  regard  to  ourselves.  We 
also  have  to  remember  that  the  process  of  demobilisa- 
tion will  be  far  simpler,  quicker,  and  cheaper  for 
Germany  than  for  us.  Even  if  the  war  ended 
to-morrow  the  German  Army  would  not  have  far 
to  go  in  order  to  get  home,  and  we  hope  that  by 
the  time  the  war  ends  the  German  Army  will  all 
have  been  driven  back  into  its  own  country  and  so 
will  be  on  its  own  soil,  only  requiring  to  be  redis- 
tributed to  its  peace  occupations.  Our  Army  will 
have  to  be  fetched  home,  firstly,  over  Continental 
railways,  probably  battered  into  a  condition  of 


GERMANY'S   ADVANTAGE  125 

much  inefficiency,  and  then  in  ships,  of  which  the 
supply  will  be  very  short.  The  process  will  be  very 
slow  and  very  costly.  Our  Overseas  Army  will  have 
to  be  sent  back  to  distant  Dominions,  and  the  Army 
of  our  American  Allies  will  have  to  be  ferried  back 
over  the  Atlantic.  Consequently  if  Germany  is  able 
to  obtain  anything  like  the  supply  of  raw  material 
that  she  requires  she  will  be  able  to  get  back  to 
peace  business  much  more  quickly  than  any  of  her 
Anglo-Saxon  enemies,  and  this  is  an  advantage  on 
her  side  which  it  would  be  unwise  to  ignore  in  con- 
sidering the  bad  effects  on  her  after-war  activities 
of  the  very  questionable  methods  by  which  she  has 
financed  and  is  financing  the  war. 

Since  we  are  indulging  in  these  comparisons,  it 
may  be  interesting  to  consider  how  our  American 
Allies  are  showing  in  this  matter  of  war  finance. 
The  Times,  in  its  "  City  Notes  "  of  April  I5th, 
observed,  in  connection  with  the  unexpectedly  small 
amount  of  the  third  Liberty  Loan,  that  the  reason 
why  the  smaller  figure  was  adopted  for  the  issue  was 
that  it  seems  quite  certain  now  that  the  original 
estimate  for  the  expenditure  in  the  fiscal  year  ending 
June  3oth  next  was  much  too  high.  This  estimate 
was  18,775  million  dollars.  The  Times  stated  that 
the  realised  amount  is  likely  to  be  hardly  more  than 
12,000  million  dollars,  of  which  about  4500  million 
dollars  will  represent  loans  to  Allies,  and  that  the 
estimate  for  the  year's  largely  increased  tax  revenue 
was  3886  million  dollars,  which  now  seems  likely  to 
be  exceeded  by  the  receipts.  If  this  be  so,  out  of  a 
total  expenditure  of  £2400  millions,  of  which  £900 


126       COMPARATIVE  WAR  FINANCE 

millions  will  be  lent  to  the  Allies,  the  Americans 
are  apparently  raising  nearly  £800  millions  out  of 
revenue.  Therefore  if  we  deduct  from  both  sides 
of  the  account  the  pre-war  expenditure  of  about 
£215  millions  and  deduct  also  the  loans  to  Allies 
from  the  expenditure,  it  leaves  the  cost  of  the  war 
to  America  £1285  millions  for  this  year  and  the  war 
revenue  £562  millions.  If  these  figures  are  correct 
it  would  thus  appear  that  America  is  raising  nearly 
half  its  actual  war  cost  out  of  revenue  as  the  war 
goes  on. 

On  the  other  hand,  in  the  New  York  Commercial 
Chronicle  of  April  6th  the  total  estimated  disburse- 
ments for  the  year  are  still  stated  at  over  16,000 
million  dollars,  that  is  to  say,  £3200  millions  roughly, 
so  that  there  seems  to  be  considerable  uncertainty 
as  to  what  the  actual  amount  of  the  expenditure 
of  the  United  States  will  be  during  the  year  ending 
on  June  3oth.  In  any  case,  there  can  be  no  question 
that  if  the  very  high  proportion  of  war  cost  paid  out 
of  revenue  shown  by  the  Times  figures  proves  to  be 
correct,  it  will  be  largely  owing  to  accident  or  mis- 
fortune ;  if  America's  war  expenditure  has  not  pro- 
ceeded nearly  as  fast  as  was  expected,  it  will  be,  no 
doubt,  owing  not  to  economies  but  to  shortcomings 
in  the  matter  of  delivery  of  war  goods  which  the 
Government  had  expected  to  pay  for  in  the  course 
of  the  fiscal  year.  It  certainly  would  have  been 
expected  that  the  Americans  would  in  this  matter 
of  war  finance  be  in  a  position  to  set  a  very  much 
higher  standard  than  any  of  the  European  belli- 
gerents owing  to  the  enormous  wealth  that  the 


AMERICA'S  EXPERIENCE  127 

country  has  acquired  during  the  two  and  a  half 
years  in  which  it,  in  the  position  of  a  neutral,  was 
able  to  sell  its  produce  at  highly  satisfactory  prices 
to  the  warring  Powers  without  itself  having  to  incur 
any  of  the  expenses  of  war.  On  the  other  hand,  its 
great  distance  from  the  actual  seat  of  operations  will 
naturally  make  it  difficult  for  the  American  Govern- 
ment to  impose  taxation  as  freely  as  might  have  been 
done  in  the  case  of  peoples  which  are  actually  on 
the  scene  of  warfare ;  so  that  it  is  hardly  safe  to 
count  on  American  example  to  improve  the  standard 
of  war  finance  which  has  been  so  lamentably  low  in 
Europe  in  the  course  of  the  present  war.  According 
to  their  original  estimates  the  proportion  of  war  cost 
borne  out  of  taxation  seems  to  have  been  on  very 
much  the  same  level  as  ours,  and  this  has  all  through 
the  war  been  very  much  lower  than  the  results 
achieved  by  our  ancestors  at  the  time  of  the 
Napoleonic  and  Crimean  wars. 

On  this  point  the  proportion  of  our  expenditure, 
which  has  been  borne  out  of  revenue,  the  Chancellor 
stated  that  up  to  the  end  of  last  financial  year, 
March  31, 1918,  the  proportion  of  total  expenditure 
borne  out  of  revenue  was  26-3  per  cent.  On  the 
estimates  which  he  submitted  to  the  House  in  his 
Budget  speech  on  April  22nd,  the  proportion  of  total 
expenditure  met  out  of  revenue  during  the  current 
financial  year  will  be  28-3  per  cent.,  and  the  pro- 
portion calculated  over  the  whole  period  to  the  end 
of  the  current  year  will  be  26-9  per  cent.  These 
proportions,  however,  are  between  total  revenue  and 
total  expenditure  during  the  war  period.  The 


128        COMPARATIVE  WAR  FINANCE 

proportion,  of  course,  is  not  so  high  when  we  try  to 
calculate  actual  war  revenue  and  war  expenditure 
by  deducting  on  each  side  at  a  rate  of  £200  millions 
a  year  as  representing  normal  expenditure  and 
revenue  and  leaving  out  advances  to  Allies  and 
Dominions.  On  this  basis  the  proportion  of  war 
expenditure  met  out  of  war  revenue  up  to  March  31, 
1918,  was,  the  Chancellor  stated,  217  per  cent. 
For  the  year  1917-18  it  was  25-3  per  cent.,  for  the 
current  year  it  will  be  26-5  per  cent.,  and  for  the 
whole  period  up  to  the  end  of  the  current  year  23-3 
per  cent.  The  corresponding  figures  for  the  Napo- 
leonic and  Crimean  wars  are  given  by  Sir  Bernard 
Mallet  in  his  book  on  British  Budgets  as  47  per  cent, 
and  47-4  per  cent.  So  that  it  will  be  seen  that, 
judged  by  this  test,  our  war  finance,  though  very 
much  better  than  Germany's,  is  not  on  so  high  a 
standard  as  that  set  by  previous  wars.  It  is  true, 
of  course,  that  the  rate  of  expenditure  during  the 
present  war  has  been  on  a  scale  which  altogether 
dwarfs  the  outgoing  in  any  previous  struggle.  The 
Napoleonic  War  is  calculated  to  have  cost  some 
£800  millions,  having  lasted  some  twenty-three  years. 
Last  year  we  spent  £2696  millions,  of  which  near 
£2000  millions  may  be  taken  as  war  cost,  after 
deducting  normal  expenditure  and  loans  to  Allies. 

Nevertheless,  this  argument  of  the  enormous  cost 
of  the  present  war  does  not  seem  to  me  to  be  a  good 
reason  why  the  war  should  be  financed  badly,  but 
rather  a  reason  for  making  every  possible  effort  to 
finance  it  well.  Are  we  doing  so  ?  At  first  sight 
it  is  a  great  achievement  to  have  increased  our  total 


THE   WEAKENED   POUND  129 

revenue  from  £200  millions  before  the  war  to  £842 
millions,  the  amount  which  we  are  expected  to 
receive  during  the  current  year  on  the  basis  of  the 
proposed  additions  to  taxation,  without  taking 
into  account  any  revenue  from  the  suggested 
luxury  tax.  But,  as  I  have  already  pointed  out, 
the  comparison  of  war  pounds  with  pre-war  pounds 
is  in  itself  deceptive.  The  pounds  that  we  are 
paying  to-day  in  taxation  are  by  no  means  the 
pounds  that  we  paid  before  the  war  ;  their  value  in 
effective  buying  power  has  been  diminished  by  some- 
thing like  one  half.  So  that  even  with  the  proposed 
additions  to  taxation  we  shall  not  have  much  more 
than  doubled  the  revenue  of  the  country  from 
taxation  and  State  services  as  calculated  in  effective 
buying  power.  When  we  consider  how  much  is  at 
stake,  that  the  very  existence,  not  only  of  the 
country  but  of  civilisation,  is  endangered  by  German 
aggression,  it  cannot  be  said  that  in  the  matter  of 
taxation  the  country  is  doing  anything  like  what  it 
ought  to  have  done  or  anything  like  what  it  would 
have  done,  willingly  and  readily,  if  a  proper  example 
had  been  set  by  the  leading  men  among  us,  and  if 
the  right  kind  of  financial  lead  had  been  given  to 
the  country  by  its  rulers. 

When  we  look  at  the  details  of  the  Budget,  it 
will  be  seen  that  the  Chancellor  has  made  a  con- 
siderable advance  upon  his  achievement  of  a  year 
ago,  when  he  imposed  fresh  taxation  amounting  to 
£26  millions,:twentypf  which  came  from  excess  profits 
duty,  and  could  therefore  not  be  counted  upon  as 
permanent,  in  his  Budget  for  a  year  which  was 


130       COMPARATIVE  WAR  FINANCE 

expected  to  add  over  £1600  millions  to  the  country's 
debt,  and  actually  added  nearly  £2000  millions. 
For  the  present  year  he  anticipates  an  expenditure 
of  £2972  millions,  and  he  is  imposing  fresh  taxation 
which  will  realise  £68  millions  in  the  current  year 
and  £114^  millions  in  a  full  year.  On  the  basis  of 
taxation  at  which  it  stood  last  year  he  estimates 
for  an  increase  of  £67  millions,  income  tax  and  super- 
tax on  the  old  basis  being  expected  to  bring  in 
£28  millions  more,  and  excess  profits  duty  £80 
millions  more,  against  which  decreases  were  esti- 
mated at  £3!  millions  in  Excise  and  £37  millions  in 
miscellaneous.  He  thus  expects  to  get  a  total 
increase  on  the  last  year's  figures  of  £135  millions, 
making  for  the  current  year  a  total  revenue  of  £842 
millions,  and  leaving  a  total  deficit  of  £2130  millions 
to  be  provided  by  borrowing.  Increases  in  taxation 
on  spirits,  beer,  tobacco,  and  sugar  bring  in  a  total 
of  nearly  £41  millions.  An  increase  of  a  penny  in 
the  stamp  duty  on  cheques  is  estimated  to  bring  in 
£750,000  this  year  and  a  million  in  a  full  year,  and 
the  increases  in  the  income  tax  and  the  super-tax 
will  bring  in  £23  millions  in  the  present  year  and  £61 
millions  in  a  full  year.  Increases  in  postal  charges 
will  bring  in  £3^  millions  this  year  and  £4  millions 
in  a  full  year. 

There  has  been  little  serious  criticism  of  these 
changes  in  taxation  except  that  many  people,  who 
seem  to  regard  the  penny  post  as  a  kind  of  fetish, 
have  expressed  regret  that  the  postal  rate  of  the 
letter  should  be  raised  to  i$d.  This  addition  seems 
to  me  to  be  merely  an  inadequate  recognition  of  the 


THE  CHEQUE  TAX  131 

depreciation  of  the  buying  power  of  the  penny  and 
to  be  fully  warranted  by  the  country's  circumstances. 
Either  it  will  bring  in  revenue  or  it  will  save  the 
Post  Office  labour,  and  whichever  of  these  objects 
is  achieved  will  increase  the  country's  power  to 
continue  the  war.  The  extra  penny  stamp  on 
cheques  has  been  rather  absurdly  objected  to  as 
being  likely  to  increase  inflation.  Since  the  effect 
of  it  is  likely  to  be  that  people  will  draw  a  smaller 
number  of  small  cheques,  and  will  make  a  larger 
number  of  their  purchases  by  means  of  Treasury 
notes,  the  tax  will  merely  result  in  the  substitution 
of  one  form  of  currency  for  another,  and  it  is  difficult 
to  see  how  this  process  will  in  any  way  increase 
inflation.  Other  arguments  might  be  adduced, 
which  make  it  undesirable  to  increase  the  outstand- 
ing amounts  of  Treasury  notes,  but  in  the  matter  of 
inflation  through  addition  to  paper  currency,  it 
seems  to  me  that  the  proposed  tax  is  entirely  blame- 
less. The  increase  of  a  shilling  in  income  tax  and 
super-tax  produced  a  feeling  of  relief  in  the  City, 
being  considerably  lower  than  had  been  anticipated. 
It  is  hardly  the  business  of  the  Chancellor  of  the 
Exchequer  in  this  most  serious  crisis  to  produce 
feelings  of  relief  among  the  taxpayers,  and  it  seems 
to  me  a  great  pity  that  he  did  not  make  much  freer 
use  of  these  most  equitable  forms  of  taxation,  having 
first  made  arrangements  (which  could  easily  have 
been  done)  by  which  their  very  severe  pressure 
would  have  been  relieved  upon  those  who  have 
families  to  bring  up.  Death  duties,  again,  he  alto- 
gether omitted  as  a  source  of  extra  revenue.  His 


132       COMPARATIVE  WAR  FINANCE 

proposed  luxury  tax  he  has  left  to  be  evolved  by  the 
wisdom  of  a  House  of  Commons  Committee,  and  has 
thereby  given  plenty  of  time  to  extravagantly 
minded  people  to  lay  in  a  store  of  stuff  before  the 
tax  is  brought  into  being. 

Space  will  not  allow  me  to  deal  fully  with  the 
Chancellor's  very  interesting  analysis  of  our  position 
as  he  expects  it  to  be  at  the  end  of  the  financial 
year  on  the  supposition  that  the  war  was  then  over. 
He  expects  a  revenue  then  of  £540  millions  on  the 
present  basis,  making,  with  the  yield  of  the  new 
taxes  in  a  full  year,  £654  millions  in  all,  without 
including  the  excess  profits  duty,  and  he  expects  an 
after-war  expenditure  of  £650  millions,  including 
£50  millions  for  pensions  and  £380  millions  for  debt 
charge.  It  seems  to  me  that  his  expectation  of 
after-war  revenue  is  too  high,  and  of  after-war 
expenditure  is  too  low.  He  says  that  the  estimates 
have  been  carefully  made,  but  that  they  include 
"  a  recovery  from  the  absence  of  war  conditions/' 
but  surely  the  absence  of  war  conditions  is  much 
more  likely  to  produce  a  diminution  than  a  recovery 
in  taxation.  Under  the  present  circumstances,  with 
prices  continually  rising,  the  profits  of  those  who 
grow  or  hold  stocks  of  goods  of  any  kind  auto- 
matically swell.  The  rise  in  prices  has  only  to 
cease,  to  say  nothing  of  its  being  turned  into  a  fall, 
to  produce  at  once  a  big  check  in  those  profits,  and 
when  we  consider  the  enormous  dislocation  likely 
to  be  produced  by  the  beginning  of  the  peace  period 
expectations  of  an  elastic  revenue  when  the  war  is 
over  seem  to  be  almost  criminally  optimistic. 


OPTIMISTIC  IMAGININGS  133 

The  Chancellor  arrived  at  his  after-war  debt 
charge  of  £380  millions  by  estimating  for  a  gross 
debt  on  March  31,  1919,  of  £7980  millions,  which 
he  reduces  to  a  net  debt  of  £6856  millions  by  deduct- 
ing half  the  expected  face  value  of  loans  to  Allies, 
£816  millions,  and  £308  millions  for  loans  to 
Dominions  and  India's  obligation.  But  is  he,  in 
fact,  entitled  to  count  on  receiving  any  interest  at 
all  from  our  Allies  for  some  years  to  come  after  the 
war  ?  If  not,  then  on  that  portion  of  our  debt 
which  is  represented  by  loans  to  Allies  we  shall  have 
to  meet  interest  for  ourselves.  He  also  gave  an 
imposing  list  of  assets  in  the  shape  of  balances  in 
hand,  foodstuffs,  land,  securities,  building  ships, 
stores  in  munitions  department,  and  arrears  of 
taxation,  amounting  in  all  to  nearly  £1200  millions. 
It  is  certainly  very  pleasant  to  consider  that  we 
shall  have  all  these  valuable  assets  in  hand ;  but 
against  them  we  have  to  allow,  which  the  Chancellor 
altogether  omitted  to  do,  for  the  big  arrears  of 
expenditure  and  the  huge  cost  of  demobilisation, 
which  is  at  least  likely  to  absorb  the  whole  of  them. 
On  the  whole,  therefore,  although  we  can  claim  that 
our  war  finance  is  very  much  better  than  that  of  our 
enemies,  it  is  difficult  to  avoid  the  conclusion  that  it 
might  have  been  very  much  better  than  it  is,  and 
that  it  is  not  nearly  as  good  as  it  is  represented  to 
be  by  the  optimistic  fancy  of  the  Chancellor  of  the 
Exchequer. 


X 

INTERNATIONAL  CURRENCY 
June,  1918 

An  Inopportune  Proposal — What  is  Currency  ? — The  Primitive 
System  of  Barter — The  Advantages  possessed  by  the 
Precious  Metals — Gold  as  a  Standard  of  Value — Its  Failure 
to  remain  Constant — Currency  and  Prices — The  Complica- 
tion of  other  Instruments  of  Credit — No  Substitute  for  Gold 
in  Sight — Its  Acceptability  not  shaken  by  the  War — A 
Fluctuating  Standard  not  wholly  Disadvantageous — An 
International  Currency  fatal  to  the  Task  of  Reconstruction 
— Stability  and  Certainty  the  Great  Needs. 

As  if  mankind  had  not  enough  on  its  hands  at  the 
present  moment,  a  number  of  well-meaning  people 
seem  to  think  that  this  is  an  opportune  time  for 
raising  obscure  questions  of  currency,  and  trying  to 
make  the  public  take  an  interest  in  schemes  for 
bettering  man's  lot  by  improving  the  arrangements 
under  which  international  payments  are  carried  out. 
Nobody  can  deny  that  some  improvement  is  possible 
in  this  respect,  but  it  may  very  well  be  doubted 
whether,  at  the  present  moment,  when  very  serious 
problems  of  rebuilding  have  inevitably  to  be  faced 
and  solved,  it  is  advisable  to  complicate  them  by 
introducing  this  difficult  question  which,  whenever 
it  is  raised,  will  require  the  most  careful  and  earnest 
consideration. 

Since,  however,  the  question  is  in  the  air,  it  mav 


THE  ORIGIN  OF  CURRENCY          135 

be  as  well  to  consider  what  is  wrong  with  our  present 
methods,  and  what  sort  of  improvements  are  sug- 
gested by  the  reformers.  At  present,  as  every  one 
knows,  international  payments  are  in  normal  times 
ultimately  settled  by  shipments  from  one  country 
to  another  of  gold.  Gold  has  achieved  this  position 
for  reasons  which  have  been  described  in  all  the 
currency  text-books.  Mankind  proceeded  from  a 
state  of  barter  to  a  condition  in  which  one  particular 
commodity  was  used  as  the  chief  means  of  payment 
simply  because  this  process  was  found  to  be  much 
more  convenient.  Under  a  system  of  barter  an 
exchange  could  only  be  effected  between  two  people 
who  happened  to  be  possessed  each  of  them  of  the 
thing  which  the  other  one  wanted,  and  also  at  the 
same  time  to  want  the  thing  which  the  other  one 
possessed,  and  the  extent  of  their  mutual  wants  had 
to  fit  so  exactly  that  they  were  able  to  carry  out 
the  desired  exchange.  It  must  obviously  have  been 
rare  that  things  happened  so  fortunately  that 
mutually  advantageous  exchanges  were  possible,  and 
the  text-books  invariably  call  attention  to  the  diffi- 
culties of  the  baker  who  wanted  a  hat,  but  was  unable 
to  supply  his  need  because  the  hatter  did  not  want 
bread  but  fish  or  some  other  commodity. 

It  thus  happened  that  we  find  in  primitive  com- 
munities one  particular  commodity  of  general  use 
being  selected  for  the  purpose  of  what  is  now  called 
currency.  It  is  very  likely  that  this  process  arose 
quite  unconsciously ;  the  hatter  who  did  not  want 
bread  may  very  likely  have  observed  that  the  baker 
had  something,  such  as  a  bit  of  leather,  which  was 


136         INTERNATIONAL  CURRENCY 

more  durable  than  bread,  and  which  the  hatter 
could  be  quite  certain  that  either  he  himself  would 
want  at  some  time,  or  that  somebody  else  would  want, 
and  he  would  therefore  always  be  able  to  exchange 
it  for  something  that  he  wanted.  All  that  is  needed 
for  currency  in  a  primitive  or  any  other  kind  of 
people  is  that  it  should  be,  in  the  first  place,  durable, 
in  the  second  place  in  universal  demand,  and,  in  the 
third  place,  more  or  less  portable.  If  it  also  pos- 
sessed the  quality  of  being  easily  able  to  be  sub- 
divided without  impairing  its  value,  and  was  such 
that  the  various  pieces  into  which  it  was  sub- 
divided could  be  relied  on  not  to  vary  in  desirability, 
then  it  came  near  to  perfection  from  the  point  of 
view  of  currency. 

All  these  qualities  were  possessed  in  an  eminent 
degree  by  the  precious  metals.  It  is  an  amusing 
commentary  on  the  commonly  assumed  material 
outlook  of  the  average  man  that  the  article  which 
has  won  its  way  to  supremacy  as  currency  by  its 
universal  desirability,  should  be  the  precious  metals 
which  are  practically  useless  except  for  purposes  of 
ornamentation.  For  inlaying  armour  and  so  adorn- 
ing the  person  of  a  semi- barbarous  chief,  for  making 
into  ornaments  for  his  wives,  and  for  the  embellish- 
ment of  the  temples  of  his  gods,  the  precious  metals 
had  eminent  advantages,  so  eminent  that  the  prac- 
tical common  sense  of  mankind  discovered  that  they 
could  always  be  relied  upon  as  being  acceptable  on 
the  part  of  anybody  who  had  anything  to  sell.  In 
the  matter  of  durability,  their  power  to  resist  wear 
and  tear  was  obviously  much  greater  than  that  of 


THE   PRECIOUS  METALS  137 

the  hides  and  tobacco  and  other  commodities  then 
fulfilling  the  functions  of  currency  in  primitive  com- 
munities. They  could  also  be  carried  about  much 
more  conveniently  than  the  cattle  which  have  been 
believed  to  have  fulfilled  the  functions  of  currency 
in  certain  places,  and  they  were  capable  of  sub- 
division without  any  impairing  of  their  value,  that 
is  to  say,  of  their  acceptability.  Merely  as  currency, 
precious  metals  thus  have  advantages  over  any 
other  commodity  that  can  be  thought  of  for  this 
purpose. 

So  far,  however,  we  have  only  considered  the 
needs  of  man  for  currency  ;  that  is  to  say,  for  a 
medium  of  exchange  for  the  time  being.  It  is 
obvious,  however,  that  any  commodity  which  fulfils 
this  function,  that  is  to  say,  is  normally  taken  in 
payment  in  the  exchange  of  commodities  and  ser- 
vices, also  necessarily  acquires  a  still  more  important 
duty,  that  is,  it  becomes  a  standard  of  value,  and 
it  is  on  the  alleged  failure  of  gold  to  meet  the  require- 
ments of  the  standard  of  value  that  the  present 
attack  upon  it  is  based.  On  this  point  the  defenders 
of  the  gold  standard  will  find  a  good  deal  of  difficulty 
in  discovering  anything  but  a  negative  defence.  The 
ideal  standard  of  value  is  one  which  does  not  vary, 
and  it  cannot  be  contended  that  gold  from  this  point 
of  view  has  shown  any  approach  to  perfection  in 
fulfilling  this  function.  It  could  only  do  so  if  the 
supply  of  it  available  as  currency  could  by  some 
miracle  be  kept  in  constant  relation  with  the  supply 
of  all  other  commodities  and  services  that  are  being 
produced  by  mankind.  That  it  should  be  constant 


138         INTERNATIONAL  CURRENCY 

with  each  one  of  them  is,  of  course,  obviously  im- 
possible, since  the  rate  at  which,  for  example,  wheat 
and  pig-iron  are  being  produced  necessarily  varies 
from  time  to  time  as  compared  with  one  another. 
Variations  in  the  price  of  wheat  and  pig-iron  are 
thus  inevitable,  but  it  can  at  least  be  claimed  by 
idealists  in  currency  matters  that  some  form  of 
currency  might  possibly  be  devised,  the  amount  of 
which  might  always  be  in  agreement  with  the 
amount  of  the  total  output  of  saleable  goods,  in  the 
widest  sense  of  the  word,  that  is  being  created  for 
man's  use. 

It  need  not  be  said  that  this  desirability  of  a 
constant  agreement  between  the  volume  of  currency 
and  the  volume  of  goods  coming  forward  for  exchange 
is  based  on  what  is  called  the  quantitative  theory  of 
money.     This  theory  is  still  occasionally  called  in 
question,  but  is  on  the  whole  accepted  by  most 
economists  of  to-day,  and  seems  to  me  to  be  a  mere 
arithmetical  truism  if  we  only  make  the  meaning  of 
the  word  "  currency  "  wide  enough  ;  that  is  to  say,  if 
we  define  it  as  including  all  kinds  of  commodities, 
including  pieces  of  paper  and  credit  instruments, 
which  are  normally  accepted  in  payment  for  goods 
and  services.     This  addition  of  credit  instruments, 
however,  is  a  complication  which  has  considerably 
confused  the  problem  of  gold  as  the  best  means  of 
ultimate    payment.    Taken    simply   by   itself   the 
quantitative  theory  of  money  merely  says  that  if 
money  of  all  kinds  is  increased  more  rapidly  than 
goods,  then  the  buying  power  of  money  will  decline, 
and  the  prices  of  goods  will  go  up  and  vice  versa. 


THE  QUANTITY   THEORY  139 

This  seems  to  be  an  obvious  truism  if  we  make  due 
allowance  for  what  is  called  the  velocity  of  circula- 
tion. If  more,  money  is  being  produced,  but  the 
larger  amount  is  not  turned  over  as  rapidly  as  the 
currency  which  was  in  existence  before,  then  the 
effect  of  the  increase  will  inevitably  be  diminished, 
and  perhaps  altogether  nullified.  But  other  things 
being  equal,  more  money  will  mean  higher  prices, 
and  less  money  will  mean  lower  prices. 

But,  as  has  been  said,  the  question  is  very 
greatly  complicated  by  the  addition  of  credit  instru- 
ments to  the  volume  of  money,  and  this  complication 
has  been  made  still  more  complicated  by  the  fact 
that  many  economists  have  refused  to  regard  as 
money  anything  except  actual  metal,  or  at  least 
such  credit  instruments  as  are  legal  tender,  that  is 
to  say,  have  to  be  taken  in  payment  for  commodities, 
whether  the  seller  wishes  to  do  so  or  not.  For 
example,  many  people  who  are  interested  in  currency 
questions  would  regard  at  the  present  moment  in 
this  country  gold,  Bank  of  England  notes,  Treasury 
notes,  and  silver  and  copper  up  to  their  legal  limits 
as  money,  but  would  deny  this  title  to  cheques. 
It  seems  to  me,  however,  that  the  fact  that  the 
cheque  is  not  and  cannot  be  legal  tender  does  not  in 
practice  affect  or  in  any  way  impair  the  effectiveness 
of  its  use  as  money.  As  a  matter  of  fact  cheques 
drawn  by  a  good  customer  of  a  good  bank  are  received 
all  over  the  country  day  by  day  in  payment  for  an 
enormous  volume  of  goods.  In  so  far  as  they  are 
so  received,  their  effect  upon  prices  is  exactly  the 
same  as  that  of  legal  tender  currency.  This  fact  is 


140         INTERNATIONAL  CURRENCY 

now  so  generally  recognised  that  the  Committee  on 
National  Expenditure  has  called  attention  to  the 
financing  of  the  war  by  bank  credits  as  one  of  the 
reasons  for  the  inflation  of  prices  which  has  done  so 
much  to  raise  the  cost  of  the  war.  It  is,  in  fact, 
being  generally  recognised  that  the  power  of  the 
bankers  to  give  their  customers  credits  enabling 
them  to  draw  cheques  amounts  in  fact  to  an  increase 
in  the  currency  just  as  much  as  the  power  of  the 
Bank  of  England  to  print  legal  tender  notes,  and 
the  power  of  the  Government  to  print  Treasury 
notes. 

Thus  it  has  happened  that  by  the  evolution  of 
the  banking  system  the  use  of  the  precious  metals 
as  currency  has  been  reinforced  and  expanded  by 
the  printing  of  an  enormous  mass  of  pieces  of  paper, 
whether  in  the  form  of  notes,  or  in  the  form  of 
cheques,  which  economise  the  use  of  gold,  but  have 
hitherto  always  been  based  on  the  fact  that  they 
are  convertible  into  gold  on  demand,  and  in  fact 
have  only  been  accepted  because  of  this  important 
proviso.  Gold  as  currency  was  so  convenient  and 
perfect  that  its  perfection  has  been  improved  upon 
by  this  ingenious  device,  which  prevented  its  actually 
passing  from  hand  to  hand  as  currency,  and  substi- 
tuted for  it  an  enormous  mass  of  pieces  of  paper 
which  were  promises  to  pay  it,  if  ever  the  holders 
of  the  paper  chose  to  exercise  their  power  to  demand 
it.  By  this  method  gold  has  been  enabled  to  circu- 
late in  the  form  of  paper  substitutes  to  an  extent 
which  its  actual  amount  would  have  made  altogether 
impossible  if  it  had  had  to  do  its  circulation,  so  to 


AN  IDEAL  SUPER-PAPER  141 

speak,  in  its  own  person.  From  the  application  of 
this  great  economy  to  gold  two  consequences  have 
followed ;  the  first  is  that  the  effectiveness  of  gold 
as  a  standard  of  value  has  been  weakened  because 
this  power  that  banks  have  given  to  it  of  circulating 
by  substitute  has  obviously  depreciated  its  value  by 
enormously  multiplying  the  effective  supply  of  it. 
Depreciation  in  the  buying  power  of  money,  and  a 
consequent  rise  in  prices,  has  consequently  been  a 
factor  which  has  been  almost  constantly  at  work  for 
centuries  with  occasional  reactions,  during  which 
the  process  went  the  other  way.  Another  conse- 
quence has  been  that  people,  seeing  the  ease  with 
which  pieces  of  paper  can  be  multiplied,  representing 
a  right  to  gold  which  is  only  in  exceptional  cases 
exercised,  have  proceeded  to  ask  whether  there  is 
really  any  necessity  to  have  gold  behind  the  paper 
at  all,  and  whether  it  would  not  be  possible  to  evolve 
some  ideal  form  of  super-paper  which  could  take  the 
place  of  gold  as  the  basis  of  the  ordinary  paper 
which  is  created  by  the  machinery  of  credit,  which 
would  be  made  exchangeable  into  it  on  demand 
instead  of  into  gold. 

It  is  difficult  to  say  how  far  the  events  of  the 
war  have  contributed  to  the  agitation  for  the  sub- 
stitution for  gold  of  some  other  form  of  international 
currency.  It  would  seem  at  first  sight  that  the 
position  of  gold  at  the  centre  of  the  credit  system 
has  been  shaken  owing  to  the  fact  that  in  Sweden 
and  some  other  neutral  countries  the  obligation  to 
receive  gold  in  payment  for  goods  has  been  for  the 
time  being  abrogated.  The  critics  of  the  gold 


142         INTERNATIONAL  CURRENCY 

standard  are  thus  enabled  to  say,  "  See  what  has 
happened  to  your  theory  of  the  universal  accept- 
ability of  gold.  Here  are  countries  which  refuse  to 
accept  any  more  gold  in  payment  for  goods.  They 
say,  '  We  do  not  want  your  gold  any  more.  We 
want  something  that  we  can  eat  or  make  into  clothes 
to  put  on  our  backs. '  '  This  is  certainly  an  extremely 
curious  development  that  is  one  of  the  by-products 
of  war's  economic  lessons.  But  I  do  not  feel  quite 
sure  that  it  has  really  taught  us  anything  new.  All 
that  has  ever  been  claimed  for  gold  is  that  it  is 
universally  acceptable  when  men  are  buying  and 
selling  together  under  more  or  less  normal  circum- 
stances. It  has  always  been  recognised  that  a  ship- 
wrecked crew  on  a  desert  island  would  be  unlikely 
to  exchange  the  coco-nuts  or  fish  or  any  other 
commodities  likely  to  sustain  life  which  they  could 
find,  for  any  gold  which  happened  to  be  in  the 
possession  of  any  of  them,  except  with  a  view  to  their 
being  possibly  picked  up  by  a  passing  ship,  and 
returning  to  conditions  under  which  gold  would 
reassume  its  old  privilege  of  acceptability. 

During  the  war  the  shipping  conditions  have  been 
such  that  many  countries  have  been  hard  put  to  it, 
especially  if  they  were  contiguous  to  nations  with 
which  the  Entente  is  at  present  at  war,  to  get  the 
commodities  which  they  needed  for  their  subsistence. 
The  Entente,  with  its  command  of  the  sea,' has  found 
it  necessary  to  ration  them  so  that  they  should  have 
no  available  surplus  to  hand  on  to  the  enemy.  They 
have  very  naturally  endeavoured  to  resist  these 
measures,  and  in  order  to  do  so  have  made  use  of 


GOLD  STILL  WANTED  143 

the  power  that  they  exercise  by  their  being  in  pos- 
session of  commodities  which  the  Entente  desires. 
They  have  shown  a  tendency  to  say  that  they  would 
not  part  with  these  commodities  unless  the  Entente 
allowed  them  to  have  a  larger  proportion  of  things 
needed  for  subsistence  than  the  Entente  thought 
necessary  for  them,  and  it  was  as  part  of  this  battle 
for  larger  imports  of  necessaries  that  gold  has  been 
to  some  extent  looked  upon  askance  as  means  of 
payment,  the  preference  being  given  to  things  to  eat 
and  wear  rather  than  to  the  metal.  These  wholly 
abnormal  circumstances,  however,  do  not  seem  to 
me  to  be  any  proof  that  gold  will  after  the  war  be 
any  less  acceptable  as  a  means  of  payment  than 
before.  The  Germans  are  usually  credited  with 
considerable  sagacity  in  money  matters,  with  rather 
more,  in  fact,  I  am  inclined  to  think,  than  they 
actually  possess ;  they,  at  any  rate,  show  a  very 
eager  desire  to  collect  together  and  hold  on  to  the 
largest  possible  store  of  gold,  obviously  with  a  view 
to  making  use  of  it  when  the  war  is  over  in  payment 
for  raw  materials,  and  other  commodities  of  which 
they  are  likely  to  find  themselves  extremely  short. 
America  also  has  shown  a  strong  tendency  to  main- 
tain as  far  as  possible  within  its  borders  the  enormous 
amount  of  gold  which  the  early  years  of  the  war 
poured  into  its  hands.  While  such  is  the  conduct 
of  the  chief  foreign  nations,  it  is  also  interesting  to 
note  that  one  comes  across  a  good  many  people  who, 
in  spite  of  all  the  admonitions  of  the  Government  to 
all  good  citizens  to  pay  their  gold  into  the  banks, 
still  hold  on  to  a  small  store  of  sovereigns  in  the 


144         INTERNATIONAL   CURRENCY 

fear  of  some  chain  of  circumstances  arising  in  which 
only  gold  would  be  taken  in  payment  for  commodi- 
ties. On  the  whole,  I  am  inclined  to  think  that  the 
power  of  gold  as  a  desirable  commodity  merely 
because  it  is  believed  to  be  always  acceptable  has 
not  been  appreciably  shaken  by  the  events  of  the 
war. 

This  does  not  alter  the  fact  that,  as  has  been 
shown  above,  gold,  complicated  by  the  paper  which 
has  been  based  upon  it,  cannot  claim  to  have  risen 
to  full  perfection  as  a  standard  of  value.  In  primi- 
tive times  the  question  of  the  standard  of  value 
hardly  arises.  Transactions  are  for  the  most  part 
carried  out  and  concluded  at  once,  and  any  seller 
who  takes  a  piece  of  metal  in  payment  for  his  goods 
does  so  with  the  rough  knowledge  of  what  that 
piece  of  metal  will  buy  for  him  at  the  moment,  and 
that  is  the  only  point  which  concerns  him.  The 
standard  of  value  only  becomes  important  when 
under  settled  conditions  of  society  long-term  con- 
tracts bulk  large  in  economic  transactions.  A  man 
who  makes  an  investment  which  entitles  him  to 
5  per  cent,  interest,  and  repayment  in  30  years' 
time,  begins  to  be  very  seriously  interested  in  the 
question  of  what  command  over  commodities  his 
annual  income  of  5  per  cent,  will  give  him,  and 
whether  the  repayment  of  his  money  at  the  end  of 
30  years  will  represent  the  repayment  of  anything 
like  the  same  amount  of  buying  power  as  his  money 
now  possesses.  It  is  here,  of  course,  that  gold  has 
failed  because,  as  we  have  seen,  the  process  has 
been  a  fairly  steady  one  of  depreciation  in  the  buying 


ADVANTAGES   OF   DEPRECIATION     145 

power  of  the  alleged  standard  and  a  rise  in  the  prices 
of  other  commodities.  This  means  to  say  that  the 
investor  who  has  accepted  repayment  at  the  end  of 
30  years  of  the  amount  that  he  lent,  be  it  £100  or 
£10,000,  has  found  that  the  money  repaid  to  him 
had  by  no  means  the  same  buying  power  as  the 
money  which  he  originally  invested. 

Within  limits  this  tendency  of  the  standard  of 
value  towards  depreciation  has  possessed  consider- 
able advantages,  probably  much  greater  advantages 
than  would  have  followed  from  the  contrary  process 
if  it  had  been  the  other  way  round.  If  we  can 
imagine  that  the  currency  history  of  the  world  had 
been  such  that  a  constantly  diminished  quantity  of 
currency  in  relation  to  the  output  of  other  commo- 
dities had  caused  a  steady  fall  in  prices,  it  is  obvious 
that  there  might  have  been  a  very  considerable 
check  to  the  enthusiasm  of  industry.  It  has  indeed 
been  contended  that  the  scarcity  of  precious  metals 
which,  with  the  absence  of  an  organised  credit 
system,  produced  this  result  during  the  later  Roman 
Empire  was  a  very  important  cause  of  the  decay 
into  which  that  Empire  fell.  I  do  not  feel  at  all 
convinced  that  this  effect  would  necessarily  have 
followed  the  cause.  It  seems  to  me  that  the 
ingenuity  of  enterprising  man  is  such  that  the  pro- 
ducer might,  and  probably  would,  have  found  means 
for  facing  the  probability  of  depreciation  in  price. 
But  it  is  always  an  empty  pastime  to  try  to  imagine 
what  would  have  happened  "  if  things  had  been 
otherwise."  What  we  do  know  is  that  a  period  of 
rising  prices,  especially  if  the  rise  does  not  go  too 


146         INTERNATIONAL  CURRENCY 

fast,  stimulates  the  enterprise  of  producers,  and  sets 
business  going  actively,  and  consequently  it  may  at 
least  be  claimed  that  the  failure  of  the  gold  standard 
to  maintain  that  steadiness  of  value  which  is  an 
obvious  attribute  of  the  ideal  standard  has  at  least 
been  a  failure  on  the  right  side,  by  tending  to 
depreciation. of  the  value  of  currency,  and  so  to  a 
rise  of  the  prices  of  other  commodities.  Obviously, 
people  will  tuck  up  their  sleeves  more  readily  to  the 
business  of  production  and  manufacture  if  the 
course  of  the  market  in  the  product  which  they  hope 
to  sell  some  day  is  likely  to  be  in  their  favour  rather 
than  against  them. 

And  when  all  is  admitted  concerning  the  failure 
of  the  existing  standard  of  value,  the  question  is, 
what  substitute  can  we  find  which  will  carry  with 
it  all  the  advantages  that  gold  has  been  shown  to 
possess,  and  at  the  same  time  maintain  that  steadi- 
ness of  value  which  gold  has  certainly  lacked  ?  We 
hear  airy  talk  of  an  international  currency  based  on 
the  credit  of  the  nations  leagued  together  to  promote 
economic  peace.  It  is  certainly  very  obvious  that 
the  diplomatic  relations  of  the  world  require  com- 
plete reform,  and  the  system  by  which  the  nations 
at  present  settle  disputes  between  themselves  has 
been  found  by  the  experience  of  the  last  four  years 
to  be  so  disgusting,  so  barbarous  and  so  ridiculous 
that  all  the  most  civilised  nations  of  the  world  are 
determined  to  go  on  with  it  until  it  is  stopped  for 
ever.  Nevertheless,  obvious  as  it  is  that  some  kind 
of  a  League  of  Nations  is  essential  as  a  form  of 
international  police  if  civilisation  is  to  be  rescued 


AN   ADDED  TERROR  147 

from  destruction,  it  is  very  doubtful  whether  such 
an  organisation  could,  at  least  during  the  first  half- 
century  or  so  of  its  existence,  be  called  upon  to  tackle 
so  difficult  a  question  as  that  of  the  creation  of  an 
international  currency  based  on  international  credit. 
In  the  first  place,  what  will  be  required  more  than 
anything  else  after  the  war  in  economic  matters 
will  be  the  elimination  of  all  possible  reasons  for 
uncertainty ;    so  much  uncertainty  and  difficulty 
will  be  inevitable  that  it  seems  to  me  to  be  almost 
criminal  to  add  to  those  uncertainties  by  an  out- 
burst of  eloquence  on  the  part  of  currency  reformers 
if  there  were  any  danger  of  their  recommendations 
being  accepted.     It  will  be  difficult  enough  to  know 
where  the  producers  of  the  world  are  to  get  raw 
material,  find  efficient  labour,  and  then  find  a  market 
for  their  products,  without  at  the  same  time  up- 
setting their  minds  with  doubts  concerning  some 
kind  of  new-fangled  currency  that  is  to  be  created, 
and  in  which  they  are  to  be  made  to  accept  payment, 
with  the  possibilities  of  changes  in  the  system  which 
may  have  to  be  effected  owing  to  some  quite  unfore- 
seen results  happening  from  its  adoption.     The  gold 
standard,  with  all  its  failures,  we  do  know  ;  we  also 
know  that  something  may  be  done  some  day  to 
remedy  them  if  mankind  can  produce  a  set  of  rulers 
capable  of  approaching  the  question  with  all  the 
knowledge  and  experience  required ;    but  to  sub- 
stitute this  system  at  a  time  of  great  uncertainty  for 
one  which  might  or  might  not  work  would  seem  to 
be  tempting  Providence  in  an  entirely  unnecessary 
manner  at   a  time  when  it   is  above  all  necessary 


148         INTERNATIONAL   CURRENCY 

to  get  the  economic  ship  as  far  as  possible  on  an 
even  keel. 

If  the  proposed  substitute  is  to  succeed  it  will 
have  to  be  at  least  as  acceptable  as  gold,  and  at  the 
same  time  its  quantity  must  be  so  regulated  as  to 
be  at  all  times  constant  in  relation  to  the  output  of 
commodities.  Can  we  pretend  that  the  economic 
enlightenment  of  mankind  has  yet  reached  a  point 
at  which  such  a  currency  could  be  produced  and 
regulated  by  the  Governments  of  the  world  and  be 
accepted  by  their  citizens  ? 


XI 

BONUS  SHARES 

July,  1918 

A  Deluge  of  Bonus  Shares — The  Effect  on  the  Market — A  Problem 
in  Financial  Psychology — The  Capitalisation  of  Reserves — 
The  Stock  Exchange  View — The  Issue  of  Bonus-carrying 
Shares — The  Case  of  the  A. B.C. — A  Wiser  Variation  from 
Canada — Bonus  Shares  on  Flotation — An  American  Device 
— Midwife  or  Doctor  ? — The  Good  and  Bad  Points  of  Both 
Systems. 

OF  the  many  kinds  of  Bonus  shares,  the  one  which 
has  lately  been  most  prominent  in  the  public  eye  is 
that  which  is  produced  by  the  capitalisation  of  a 
reserve  fund.  There  has  lately  been  a  perfect 
epidemic  of  this  kind  of  Bonus  share,  which  is  almost 
as  plentiful  as  the  caterpillars  in  the  oak  trees  and 
the  green  fly  on  the  allotments.  The  reason  for 
this  outburst  is  apparently  the  anxiety  which  the 
directors  of  many  prosperous  industrial  companies 
feel  lest  the  high  dividends  which  good  management 
and  sound  finance  in  the  past  have  enabled  them  to 
pay  should  lay  them  open  to  misunderstanding  and 
attack  by  well-meaning  people  who  think  that  it  is 
a  crime  for  a  company  to  earn  more  than  a  certain 
percentage  on  its  capital. 

This  explanation  was  very  frankly  given  by  the 

L 


150  BONUS   SHARES 

directors  of  Brunner,  Mond  and  Company,  when 
they  lately  capitalised  part  of  their  reserves.  The 
company,  they  stated,  has  for  many  years  paid  a 
dividend  on  its  Ordinary  shares  of  27^  per  cent.,  and 
"  the  directors  feel  that  there  is  a  widespread  impres- 
sion that  this  is  the  rate  of  profit  earned  on  the  total 
of  the  capital  invested,  and  consequently  that  the 
company  is  making  an  unfair  profit  out  of  its 
customers  and  the  labour  it  employs.  This  is  by 
no  means  the  case."  It  is  a  lamentable  proof  of  the 
backward  state  of  the  economic  education  of  this 
country  that  it  should  be  necessary  for  well-financed 
and  prosperous  concerns  to  take  steps  to  make  it 
quite  clear  to  the  public  that  they  are  not  earning 
more  than  they  appear  to  be.  In  a  well-edycated 
community  it  would  be  perceived  at  once  that  it  is 
the  well-financed  and  prosperous  companies  which 
improve  production  in  the  interests  of  their  share- 
holders, their  workmen,  and  the  public ;  that  the 
price  which  the  public  pays  for  a  commodity  is 
ultimately  the  price  at  which  the  worst  financed  and 
worst  managed  companies  can  just  manage  to  keep 
alive ;  that  the  higher  profits  earned  by  the  better 
companies  are  not  wrung  out  of  the  pockets  of  the 
community,  or  their  workmen,  but  are  the  result  of 
good  management  and  good  finance ;  and  that  the 
more  the  good  companies  are  encouraged  to  go  ahead 
and  drive  the  bad  ones  out  of  existence,  the  better 
will  the  community  be  served,  and  the  better  will 
be  the  chance  of  the  workmen  to  get  good  wages. 
These  platitudes  are,  of  course,  only  true  in  a  state 
of  free  competition.  If  there  is  anything  like 


CAPITALISING   RESERVES  151 

monopoly  the  public  and  the  workers  are  fully  justified 
in  being  suspicious  and  examining  the  source  from 
which  high  dividends  are  produced. 

Such  being  the  reason  why  this  outburst  of 
capitalisation  of  reserves  first  began — since  in  these 
days  all  capitalists  and  those  who  have  to  manage 
capital  feel  that  they  are  working  under  criticism, 
which  is  not  only  jealous  and  suspicious  (as  it  should 
be),  but  is  also  too  often  both  ignorant  and  preju- 
diced— it  is  interesting  to  note  that  the  movement 
which  was  so  started  has  been  stimulated  by  its 
very  exhilarating  effect  on  the  market  in  the  shares 
of  the  companies  concerned.  Why  this  should  be 
so  it  is  difficult  at  first  sight  to  say.  What  happens 
is  merely  this — that  a  company,  let  us  suppose,  for 
the  sake  of  simplicity,  with  a  capital  consisting 
wholly  of  3,000,000  Ordinary  shares,  has  accumu- 
lated out  of  past  profits,  or  out  of  premiums  on  new 
issues  of  shares,  a  reserve  fund  of  £1,000,000.  Its 
net  profit  has  lately  averaged  £400,000,  and  it  has, 
year  by  year,  distributed  £300,000  in  the  shape  of 
a  10  per  cent,  dividend  to  its  shareholders,  and 
put  £100,000  into  its  reserve  fund,  which  is  repre- 
sented on  the  other  side  of  the  balance-sheet  by 
buildings  and  plant  and  a  certain  amount  of  first- 
class  investments.  If  the  directors  now  decide  to 
capitalise  that  £1,000,000  of  reserve  fund,  the  only 
effect  is  that  each  shareholder  will  be  given  one  new 
share  for  every  three  which  he  holds  in  the  existing 
capital,  the  reserve  fund  will  be  wiped  out,  and  the 
ordinary  capital  will  be  increased  from  £3,000,000  to 
£4,000,000.  None  of  the  shareholders  will  be  in 


152  BONUS   SHARES 

actual  fact  better  off  to  the  extent  of  one  halfpenny, 
because  all  will  be  in  the  same  position  with  regard 
to  one  another ;  their  relative  shares  in  the  enter- 
prise will  not  have  been  altered.  If  we  imagine,  by 
way  of  simplifying  the  problem,  that  all  the  Ordinary 
shares  were  in  one  hand,  that  one  holder  would  have 
had  in  his  Ordinary  shares  a  claim  to  the  total 
assets  of  the  company,  that  is  to  say,  to  its  earning 
power  as  long  as  it  is  a  going  concern,  and  to  what- 
ever its  assets  realise  if  it  went  into  liquidation  ;  the 
fact  that  £1,000,000  worth  of  the  assets  had  been 
bought  out  of  past  profits  or  premiums  paid  on  new 
issues  of  shares  would  have  already  added  to  the 
value  of  the  claim  that  he  had  on  the  property 
of  the  company,  and  no  addition  would  be  made 
to  that  value  by  turning  the  reserve  fund  into 
shares. 

In  other  words,  the  reserve  fund  is  already  the 
property  of  the  shareholders,  and  to  convert  it  from 
reserve  fund  into  capital,  making  them  a  present  of 
new  shares,  which  merely  represent  their  claim  to 
the  assets  held  against  the  reserve  fund,  is  as  empty 
a  gift  as  presenting  a  man  with  a  piece  of  paper 
informing  him  that  he  is  the  owner  of  his  own  hat. 
All  this  remains  equally  true  if,  besides  the  ordinary 
capital,  there  is  a  considerable  amount  outstanding 
of  Preference  shares  and  Debenture  debt.  In  any 
case,  the  Ordinary  shareholders  possess  a  claim  to 
the  earning  power  of  the  company  when  prior  charges 
have  been  satisfied,  and  to  whatever  surplus  may 
remain  on  liquidation  after  first  charges  have  been 
paid  off  in  full.  Whether  that  interest  of  theirs  is 


THE   EARNING   POWER  153 

represented  by  a  larger  or  smaller  number  of  shares, 
or  by  shares  of  a  larger  or  smaller  denomination,  or 
by  a  reserve  fund  upon  which  they  have  a  claim 
when  all  other  claims  have  been  settled  makes  no 
difference  whatever  as  a  matter  of  academic  fact. 
Apart  from  the  sentiment  of  the  matter,  there  is  no 
reason  why  ordinary  capital  should  have  any  nominal 
value. 

As  to  the  earning  power  of  the  company,  that,  of 
course,  is  not  affected  one  whit  by  the  process.  The 
earning  power  of  the  company  is  all  in  the  assets — 
the  plant,  machinery  and  other  property — plus  the 
elusive  qualities  which  are  bound  up  in  the  word 
"  goodwill/'  representing  the  selling  power,  organisa- 
tion, and  the  expectation  of  future  profits.  The 
capitalisation  of  the  reserve  simply  affects  the  manner 
in  which  the  liabilities  of  the  company  are  arranged, 
and  the  existence  of  a  reserve  fund  merely  means 
that  the  Ordinary  shareholders  have  a  claim  to  a 
larger  amount  than  their  nominal  holding  in  case 
of  liquidation.  It  does  not  matter  in  the  least 
whether  this  larger  claim  is  handed  to  them  in  the 
shape  of  a  certificate,  since  the  nominal  amount  of 
their  claim  has  nothing  whatever  to  do  with  the 
amount  that  their  claim  realises  to  tfrem  annually  in 
the  shape  of  dividends,  or  in  the  event  of  liquidation, 
from  the  realisation  of  the  company's  assets. 

In  fact,  the  capitalisation  of  reserves  is  sometimes 
criticised  by  economic  purists  as  a  retrograde  step 
because  it  seems  likely  to  encourage  the  directors  to 
be  extravagant  in  the  matter  of  dividends.  In  the 
example  which  we  supposed  above  of  the  company 


154  BONUS   SHARES 

with  a  capital  of  three  millions  and  reserve  fund  of 
one  million,  if  the  reserve  fund  is  turned  into 
Ordinary  shares-  and  the  earning  power  of  the 
company  remains  the  same  there  may  obviously  be 
a  temptation  to  the  directors  to  modify  the  prudent 
policy  under  which  they  had  hitherto  placed  one 
hundred  thousand  a  year  to  reserve,  because  if  they 
continued  it  the  shareholders  would  discover  they 
were  really  no  better  off  and  that  they  simply  got  a 
lower  rate  of  dividend  on  the  larger  amount  of  shares, 
and  that  their  actual  receipts  from  the  company  were 
exactly  the  same  as  before.  And  if  the  earning 
power  of  the  company  remained  the  same  and  the 
directors  left  off  placing  the  one  hundred  thousand 
a  year  to  reserve,  and  paid  away  the  whole  of  the 
net  profit  in  dividend,  it  is  clear  that  the  progressive 
expansion  of  the  company's  business  would  be  to 
that  extent  checked.  On  the  other  hand,  there  is  a 
contrary  argument  that  as  long  as  the  company  has 
a  large  reserve  fund  there  is  a  possibility  that  dis- 
satisfied shareholders  may  agitate  for  a  realisation 
of  sufficient  assets  to  enable  that  reserve  fund  to  be 
distributed,  especially  if  it  has  been  wholly  acquired 
out  of  past  profits.  In  this  case  the  capitalisation 
of  the  reserve  fund  puts  this  temptation  out  of  their 
reach  since,  when  once  the  reserve  fund  has  been 
capitalised,  it  can  only  be  got  at  by  greedy  share- 
holders through  the  process  of  liquidation.  Since, 
however,  the  shareholder  in  these  times  is  not 
quite  so  short-sighted  as  he  used  to  be,  there  is 
not  perhaps  really  very  much  advantage  in  this 
point. 


A    PLEASANT  DELUSION  155 

But  since,  as  has  been  shown,  capitalisation  of 
reserves  has  no  effect  upon  the  earning  power  and 
assets  of  the  company,  it  is  interesting  to  try  and 
discover  why  the  rumour  and  announcement  of  such 
an  intention  on  the  part  of  the  board  of  directors  is 
nearly  always  accompanied  by  a  rise  in  the  shares 
of  the  company  affected.  If  the  shareholder  is 
merely  to  be  given  a  larger  nominal  claim,  which 
does  not  in  the  least  affect  the  value  of  the  assets 
which  that  claim  concerns,  and  if  the  relative 
amount  of  his  claim  is  exactly  the  same  with  regard 
to  the  other  shareholders,  it  is  clear  that  the  rise 
in  the  value  of  the  shares  is  based  entirely  either 
on  a  psychological  mistake  on  the  part  of  the  public 
and  its  financial  advisers,  or  on  the  fact  that  the 
transaction  called  attention  to  the  value  of  the  shares 
which  have  hitherto  been  undervalued  in  the  market. 
Probably  the  movement  arises  from  both  these 
causes.  A  large  number  of  people  think  they  are 
better  off  if  they  have  a  larger  nominal  share, 
without  considering  that  all  the  other  shareholders 
are  at  the  same  time  having  their  claim  increased, 
that  the  assets  to  which  they  all  have  a  claim  are 
not  being  increased,  and  that,  consequently,  if  a 
sharing-out  process  were  to  take  place  they  would 
all  be  exactly  as  they  would  have  been  if  no  such 
capitalisation  of  reserves  had  been  carried  out.  And 
if  a  sufficient  number  of  people  think  that  a  share 
or  any  other  commodity  is  more  valuable,  it  thereby 
becomes  more  valuable,  because  value  is  nothing  else 
than  the  amount,  whether  in  money  or  other  com- 
modities, at  which  a  commodity  can  be  disposed  of. 


156  BONUS   SHARES 

But  it  is  also  true  that  there  are,  at  all  times,  a 
very  large  number  of  securities,  especially  in  the 
industrial  market,  which  would  stand  higher  if  their 
earning  power  and  position  were  more  closely 
scrutinised.  This  is  very  clearly  seen  to  be  the  case 
from  the  apparently  extravagant  prices  at  which 
insurance  companies,  for  example,  sometimes  buy 
the  businesses  of  one  another.  They  give  a  price 
which  is  considerably  above  the  market  value  of  the 
concern  as  represented  by  the  price  of  its  shares. 
Critics  say  that  the  terms  are  extravagant,  and  yet 
the  deal  is  found  to  be  highly  profitable  to  the 
buying  company.  The  profit  of  the  deal,  of  course, 
may  be  increased  by  the  advantages  of  amalgama- 
tion, but  quite  apart  from  that  it  is  clear  that  the 
market  price  of  securities  very  often  undervalues, 
as  it  also,  perhaps,  still  oftener  overvalues,  the  real 
position  of  the  companies  on  whose  earning  powers 
they  represent  claims.  In  any  case,  there  is  the  fact 
that  these  capitalisations  of  reserve  funds,  which 
make  no  real  difference  to  the  actual  position  of  the 
company,  are  universally  regarded,  in  the  language 
of  the  Stock  Exchange,  as  "bull  points."  It  is 
assumed,  of  course,  that  the  directors  would  not 
carry  out  such  an  operation  unless  they  saw  their 
way  to  a  higher  earning  power  in  the  future  as  a 
justification  for  the  larger  capital.  In  this  expecta- 
tion the  directors  might  be  right  or  wrong,  and,  even 
if  they  are  right,  that  prospect  of  higher  earning 
power,  if  market  prices  could  be  relied  upon  to 
express  the  true  position  of  a  company,  would  have 
been  "  in  the  price." 


CHEAP   NEW   SHARES  157 

There  is  another  kind  of  Bonus  share,  which  is 
not  exactly  a  Bonus  share,  but  carries  a  bonus  with 
it.     This  comes  into  being  when  the  directors  of  a 
company  sell  new  shares  to  existing  shareholders  at 
a  price  below  the  terms  which  they  might  have 
obtained  if  they  made  a  new  issue  to  the  general 
public.     The  classical  example  of  this  system  is  the 
Aerated  Bread  Company,   that  concern  to  which 
City  clerks  and  journalists  and  others  owe  so  much 
as  pioneers  of  cheap  and  simple  catering.     It  will  be 
remembered  that  in  the  palmy  days  of  this  company, 
before  it  had  been  severely  cut  into  by  competition, 
its  £i  shares  used  to  stand  in  the  neighbourhood  of 
£15.     The  directors  used  then  to  make  issues  of 
new  shares  to  existing  shareholders  at  their  face 
value,  that  is  to  say,  at  £i  per  share,  although  it  was 
obvious  that  if  they  had  made  a  public  issue  inviting 
all  and  sundry  to  subscribe  they  could  have  sold 
their  new  issues  at  or  above  £14  per  share.    This 
system  put  an  enormous  bonus  in  the  pockets  of  the 
existing  shareholders  at  the  expense  of  the  company 
and  its  future  prospects.     The  directors  practically 
gave  to  the  existing  shareholders  a  present  of  £130,000 
if  they  sold  them  10,000  new  shares  for  £10,000, 
which  they  and  the  public  would  have  readily  sub- 
scribed for  at  £140,000.     There  was  nothing  wicked 
about  the  process,  but  it  was  extremely  shortsighted, 
If  the  company  had  retained  the  monopoly  which 
its  pioneer  work  as  a  cheap  caterer  for  a  long  time 
secured  it,  it  might  have  kept  its  prosperity  unim- 
paired even  by  this  shortsighted  finance.    £s  it  was, 
success  attracted  several  competitors,  some  of  which 


158  BONUS   SHARES 

were  extremely  well  managed  and  financed,  and 
although  it  still  does  a  most  useful  work  for  the 
community,  its  earning  power  has  suffered  con- 
siderably. But  this  is  only  an  extreme  example  of  a 
system  which  is  reasonable  enough  if  it  is  not  carried 
too  far.  The  Canadian  Pacific  Railway,  for  instance, 
has  for  many  years  adopted  a  very  moderate  use  of 
this  system,  making  new  issues  to  its  shareholders 
on  terms  rather  cheaper  than  it  could  have  obtained 
by  a  public  issue,  but  not  giving  away  enough  to 
impair  its  future  seriously  in  order  to  make  presents 
to  the  existing  stockholders  by  this  means.  By  the 
continued  making  of  small  presents  to  their  con- 
stituents the  directors  of  the  company  have  obtained 
the  support  of  a  very  loyal  body  of  stockholders,  who 
feel  that  they  are  being  well  treated  but  not  pam- 
pered. This  system  of  granting  a  small  bonus  to 
existing  shareholders  on  occasions  when  the  company 
has  to  issue  new  capital  is  one  which  is  quite  unob- 
jectionable as  long  as  it  is  not  abused.  If,  owing 
to  the  use  of  it,  the  directors  are  encouraged  to 
finance  themselves  badly,  that  is  to  say,  to  pay  out 
of  new  capital  for  improvements  and  extensions 
which  a  more  prudent  policy  would  have  financed 
out  of  earnings,  just  because  they  find  that  these 
issues  carrying  a  small  bonus  makes  them  popular 
with  the  stockholders,  then  the  system  is  being 
abused.  Otherwise  there  seems  no  reason  to  object 
to  a  measure  which  keeps  the  shareholders  happy 
and  does  not  do  any  harm  to  the  concern  so  long  as 
it  is  worked  in  moderation. 

Finally,  there  is  a  Bonus  share  or  stock  which 


CAPITALISING   PERHAPSES  159 

does  not  represent  accumulation  out  of  vast  profits 
or  issues  of  new  shares  at  a  premium,  and  does  not 
involve  a  bonus  by  the  sale  to  existing  shareholders 
at  a  price  below  the  terms  which  could  be  got  in  the 
market,  but  is  at  first  sight  pure  water,  representing 
merely  possibilities,  perhapses,  and  potentialities. 
This  kind  of  Bonus  share  is  chiefly  known  on  the 
other  side  of  the  Atlantic,  and  is  usually  damned 
with  bell,  book  and  candle  by  purists  among  English 
financial  critics.  We  say  on  this  side  of  the  water 
that  every  pound  of  an  English  well-financed  com- 
pany represents  a  pound  which  has  actually  been 
spent  and  put  into  tangible  assets  which  help  the 
company  to  earn  profits.  This  boast  is  by  no  means 
true,  since  nearly  all  industrial  companies  come  into 
being  with  something  paid  for  in  the  shape  of  good- 
will, which  is  of  enormous  importance,  but  can 
hardly  be  called  a  tangible  asset ;  and  even  in  the 
case  of  our  railway  companies,  many  millions  of 
original  capital  went  into  Parliamentary  and  legal 
expenses,  which  have  been,  in  one  sense,  dead  capital 
ever  since,  though  without  this  expenditure  the 
railways  could  never  have  got  to  work.  The 
American  system  of  Common  shares,  representing 
what  appears  to  be  water,  is  only  a  modification  of 
what  every  company  has  to  do,  in  one  form  or 
another,  on  this  side  or  anywhere  in  the  world. 
Wherever  an  existing  business  is  bought  out  some- 
thing has  to  be  given  over  and  above  the  old  iron 
value  of  the  concern  for  the  value  of  the  connection 
and  other  intangible  assets.  Wherever  an  entirely 
new  industry  is  started  it  has  to  meet  certain  initial 


160  BONUS    SHARES 

expenses.  It  has  to  placate,  to  use  the  unpleasant 
American  word,  various  interests  in  order  to  get  to 
work,  or  it  has  to  lay  out  money  in  building  up  a 
concern  by  advertising  or  otherwise.  It  is  impossible 
that  every  penny  which  is  put  into  it  will  go  into 
actual  buildings,  plant,  machinery,  and  stock-in- 
trade. 

In  America  the  system  has  been  preferred  by 
which  the  actual  tangible  assets  of  a  new  concern  are 
financed  wholly  or  largely  by  issues  of  bonds  or 
Preferred  stock,  and  the  Common  stock  is  given 
away  to  those  interested  in  the  promotion,  for  them 
either  to  hold  or  to  use  in  order  to  secure  the  co-opera- 
tion of  those  who  may  be  useful,  or  modify  the 
opposition  of  those  who  may  be  dangerous.  The  net 
result  of  it  is  that  the  Common  stock  is  represented 
in  fact  by  goodwill  or  the  power  to  get  to  work.  If 
the  company  prospers,  then  it  is  the  business  of  those 
who  hold  these  Common  shares  to  see  that  assets 
are  accumulated  o>it  of  profits,  to  be  held  against 
their  Common  stock,  so  squeezing  the  water  out  of 
it  and  making  it  good.  The  system  thus  possesses 
this  very  considerable  advantage,  that  those  who 
promote  a  company  are  interested  in  its  future 
welfare,  and  watch  over  it  and  guide  it  through  its 
subsequent  existence,  putting  energy  and  good 
management  at  its  disposal  in  order  that  the  paper 
which  they  hold  may  be  represented,  not  by  water, 
but  by  real  assets,  and  so  may  bring  them  a  tangible 
reward.  It  has  thus  in  some  ways  a  great  advantage 
over  the  English  system,  by  which  the  company 
promoter  is  too  often  concerned  merely  in  the 


• 


MIDWIFE   OR   DOCTOR?  161 

immediate  success  of  the  promotion.  He  is,  as  one  of 
the  greatest  of  them  described  himself,  a  mere  mid- 
wife, who  brings  the  interesting  infant  into  the  world, 
pats  its  little  head,  says  good-bye  to  it,  and  leaves 
it  to  take  care  of  itself  throughout  its  troubled 
existence.  By  the  American  system  the  promoter 
is  not  a  midwife  but  a  doctor  who  assists  at  the  birth 
of  the  infant,  and  also  watches  over  its  youth  and 
makes  every  effort  to  guide  its  toddling  footsteps  in 
such  a  way  that  it  may  grow  into  lusty  manhood. 
It  is  not  until  he  has  done  so  that  he  is  enabled,  by 
the  sale  of  the  shares  which  were  given  to  him  at  the 
beginning,  to  realise  the  full  profit  which  he  expected. 
The  profits  realised  by  this  method  are  in  many  cases 
enormous.  On  the  other  hand,  the  amount  of  work 
that  is  put  in  to  secure  them  is  infinitely  greater  than 
happens  in  the  case  of  the  English  midwife  pro- 
moter ;  and  if  the  enterprise  is  a  failure,  then  the 
promoter  goes  without  his  profits. 

The  system,  like  everything  else,  is  liable  to  abuse, 
if  a  rascally  board  of  directors,  in  a  hurry  to  unload 
their  holding  of  Common  stock  on  an  unsuspecting 
public,  makes  the  position  and  prospects  of  the 
company  look  better  than  they  are  by  unscrupulous 
bookkeeping  and  extravagant  distribution  of  profits, 
earned  or  unearned.  These  things  happen  in  a  world 
in  which  the  ignorance  of  the  public  about  money 
matters  is  a  constant  invitation  to  those  who  are 
skilled  in  them  to  relieve  the  public  of  money 
which  it  would  probably  mis-spend;  but,  if  well 
and  honestly  worked,  the  system  is  by  no  means 
inherently  unsound,  as  some  English  critics  too 


162  BONUS   SHARES 

often  assume,  and  it  has  been  shown  that  it  carries 
with  it  a  very  great  and  substantial  advantage  in 
the  hands  of  honest  people  who  wish  to  conduct 
the  business  of  company  promotion  on  progressive 
lines. 


XII 

STATE  MONOPOLY  IN  BANKING 

August,  1918 

Bank  Fusions  and  the  State — Their  Effects  on  the  Bank  of 
England — Mr  Sidney  Webb's  Forecast — His  Views  of  the 
Benefits  of  a  Bank  Monopoly — The  Contrast  between 
German  Experts  and  British  Amateurs — Bankers1  Charges 
as  affected  by  Fusions — The  Effects  of  Monopoly  without 
the  Fact — The  "  Disinterested  Management  "  Fallacy — 
The  Proposal  to  split  Banking  Functions — A  Picture  of  the 
State  in  Control. 

A  FEW  months  ago,  writing  in  this  Journal  on  the 
subject  of  banking  amalgamations,  I  referred  to  one 
of  the  objections  against  them,  that  they  tended 
towards  the  creation  of  monopoly,  and  so  encouraged 
hope  on  the  part  of  those  who  would  like  to  see  all 
forms  of  industry  managed  by  the  State,  that  the 
banking  business  might  sooner  or  later  be  taken  over 
and  worked  as  a  State  monopoly.  At  that  time  this 
danger  of  monopoly  seemed  to  be  still  fairly  remote, 
but  since  then  the  progress  of  amalgamations  has 
brought  it  appreciably  nearer,  and  so  has  vigorously 
stimulated  both  the  hopes  and  fears  of  those  who 
consider  that  it  tends  to  bring  nearer  the  seizure 
of  banking  business  by  the  State.  The  fear  is 
expressed  by  Sir  Charles  Addis,  manager  of  the 
Hongkong  Bank  and  director  of  the  Bank  of  England, 
in  the  July  number  of  the  Edinburgh  Review,  in 


164     STATE   MONOPOLY   IN   BANKING 

a  very  interesting  article  on  the  "  Problems  of  British 
Banking."     Sir  Charles  observes  that : 

"  It  may  even  be  questioned  whether  the  gigantic 
size  they  have  already  attained  does  not  constitute  a 
menace  to  the  predominant  position  which  the  Bank  of 
England  has  hitherto  enjoyed  as  the  bankers'  bank.  How 
will  the  Bank  of  England  be  able  to  maintain  its  supre- 
macy and  control  the  money  market,  surrounded  by 
banks  individually  greater  and  more  powerful  than 
itself,  especially  when  the  object  in  view  is  by  raising 
the  rate  of  interest  to  prevent  an  internal  or  external 
drain  upon  our  gold  reserve  ?  It  is  even  conceivable 
that  the  finance  of  the  State  may  be  threatened,  and 
it  is  probably  for  this  reason  that  in  Germany  the 
Prussian  Minister  is  said  to  be  considering  a  State 
monopoly  of  banking.  Nor  can  the  psychological  effect 
of  these  great  aggrandisements  of  capital  in  the  hands 
of  a  few  banks  be  ignored.  They  are  virtually  Govern- 
ment-guaranteed institutions.  The  insolvency  of  one 
of  the  great  banks  would  involve  such  widespread 
disaster  that  no  Government  could  stand  aside.  They 
would  be  compelled  to  make  use  of  the  national  resources 
in. order  to  guarantee  the  solvency  of  private  banks. 
From  Government  guarantee  to  Government  control  is 
but  a  step,  and  but  one  step  more  to  nationalisation. 
We  are  playing  into  the  hands  of  Mr  Sidney  Webb  and 
the  Socialists/' 

As  it  happens,  in  the  July  number  of  the  Con- 
temporary Review,  Mr  Sidney  Webb  was  developing 
the  same  theme,  namely,  the  inevitability  of  banking 
monopoly  and  the  necessity,  as  he  conceives  it,  of 
defeating  private  monopoly  for  the  sake  of  profit, 
by  State  monopoly  to  be  worked,  as  he  hopes,  in 
the  public  interest.  His  article  is  headed  by  the 
rather  misleading  title,  "  How  to  Prevent  Banking 


THE   BUREAUCRATIC   SAVIOUR       165 

Monopoly,"  for,  as  has  been  said,  Mr  Webb  very 
much  wants  monopoly,  says  that  it  cannot  be  helped, 
and  sees  the  fulfilment  of  some  of  his  pet  Socialistic 
dreams  in  the  direction  of  it  by  the  bureaucrat  whom 
he  regards  as  the  heaven-sent  saviour  of  society. 
His  very  interesting  argument  is  most  easily  followed 
'by  means  of  a  series  of  quotations. 

"  We  are,  it  is  said,  within  a  measurable  distance  of 
there  being — save  for  unimportant  exceptions — only  one 
bank,  under  one  general  manager,  probably  a  Scotsman, 
whose  power  over  the  nation's  industry  would  be  incal- 
culable. Even  in  the  crisis  of  the  war  the  matter  is 
receiving  the  attention  of  the  Government. 

"  In  the  opinion  of  the  present  writer,  the  amalgama- 
tion of  banks  in  this  country,  which  has  been  going  on 
continuously  for  a  century,  though  at  varying  rates,  and 
is  being  paralleled  in  other  countries,  notably  in  Ger- 
many, and  latterly  in  the  Canadian  Dominion,  is  an 
economically  inevitable  development  at  a  certain  stage 
of  capitalist  enterprise,  and  one  which  cannot  effectively 
be  prevented." 

Mr  Webb  considers  that  there  is  no  economic 
limit  to  this  policy  of  amalgamation,  and  that  the 
gains  it  carries  with  it  are  obvious.  He  dilates  upon 
these  as  follows  : — 

"  It  may  be  worth  pointing  out : 

"  (a)  That  apart  from  the  obvious  economies  in  the 
cost  of  administration,  common  to  all  business  on  a 
large  scale,  there  is,  in  British  banking  practice,  a  special 
advantage  in  a  bank  being  as  extensive  and  all-pervasive 
as  possible.  Where  distinct  banks  co-exist,  there  can 
be  no  assurance  that  the  periodical  shifting  of  business, 
the  perpetual  transformations  in  industrial  organisation, 
the  rise  and  fall  of  industries,  localities  or  firms,  the 

M 


i66     STATE   MONOPOLY   IN   BANKING 

changes  of  fashion  and  the  ebb  and  flow  of  demand,  and 
even  a  relative  diminution  of  reputation  may  not  lead 
to  a  shrinking  of  the  deposits  and  current  account 
balances  of  any  one  bank,  or  even  of  each  bank  in  turn. 
Accordingly,  every  bank  has  to  maintain  an  uninvested, 
or,  at  least,  a  specially  liquid,  reserve  to  meet  such  a 
possible  withdrawal.  The  smaller,  the  more  numerous, 
the  more  specialised  by  locality  or  industry  are  the 
competing  banks,  the  larger  must  be  this  reserve.  On 
the  other  hand,  if  all  the  deposit  and  current  accounts 
of  the  nation  were  kept  at  one  bank,  even  if  it  has 
innumerable  branches,  as  the  experience  of  the  Post 
Office  Savings  Bank  shows,  no  such  shifting  of  business 
would  affect  it ;  no  mere  transfers  from  firm  to  firm  or 
from  trade  to  trade  would  involve  any  shrinking  of  its 
aggregate  balances ;  and  it  would  need  only  to  have  in 
hand,  somewhere,  sufficient  currency  to  replenish 
temporarily  a  local  drain  on  its '  till  money.'  The  nearer 
the  banks  can  approach  to  this  condition  of  monopoly, 
not  only  the  lower  will  be  their  percentage  of  working 
expenses,  but  also  the  greater  will  be  the  financial 
stability,  and  the  smaller  the  amount  that  they  will  need 
to  keep  uninvested  in  order  to  meet  possible  withdrawals. 
"  (b)  That  the  process  of  amalgamation  has  involved 
an  ever-increasing  elimination,  from  the  British  banking 
business,  of  the  typical  profit-maker,  first  as  partner  in 
a  private  bank,  then  as  a  director  in  a  Joint  Stock  bank, 
representing  a  large  personal  holding  of  shares ;  and 
the  gradual  transfer  of  practically  the  whole  conduct  of 
the  business  to  what  may  be  called  '  disinterested 
management ' — that  is  to  say,  management  by  trained, 
professional  officers  serving  for  salaries,  whose  remunera- 
tion bears  no  relation  to  the  profit  made  on  each  piece 
of  business  transacted.  The  part  played  in  the  business 
by  the  directors  themselves  seems  to  be,  with  every 
increase  in  the  magnitude  and  scope  of  the  concern, 
steadily  diminishing  ;  and  these  directors,  moreover, 
come  to  be  chosen,  more  and  more,  not  because  of  their 


CASH   RESERVES  167 

large  holdings  of  shares,  or  because  of  their  ancestral  or 
personal  connection  with  banking,  but  because  of  their 
reputation  or  influence,  commercial,  social  or  political. 
The  result  is  that,  along  with  the  process  of  amalgama- 
tion, there  has  been  going  on  a  transfer  of  the  whole 
management  of  banking  to  the  hierarchy  of  salaried 
officials ;  whilst  the  supreme  decisions  on  financial 
policy  are  in  the  hands,  in  practice,  of  a  very  small 
group  of  salaried  general  managers,  only  partially  in 
consultation  with  an  equally  small  group  of  chairmen  of 
boards  of  directors,  themselves  usually  drawing  not 
inconsiderable  salaries." 

It  seems  to  me  that  Mr  Webb  exaggerates  in 
rather  a  dangerous  degree  the  reduction,  through 
amalgamation,  of  the  necessity  which  obliges  a  bank 
to  keep  a  considerable  reserve  of  cash.  It  is  quite 
true  that  under  normal  circumstances  cash  with- 
drawn from  one  bank  finds  its  way  in  due  course  to 
another,  and  that  with  regard  to  these  mere  "  till 
money"  transfers  there  might  be  a  considerable 
reduction  in  the  amount  of  cash  required  if  all  the 
banking  of  the  country  were  in  the  hands  of  one 
business,  so  that  what  was  withdrawn  from  one 
branch  would  be  paid  into  another.  But  this  fact 
would  not  alter  the  need  which  compels  a  bank  to 
keep  considerable  reserves  in  cash  in  order  to  provide 
against  the  possibility  of  a  run.  A  State  bank,  if 
the  public  takes  it  into  its  head  that  it  prefers  to  have 
a  larger  proportion  of  currency  in  its  own  pocket 
rather  than  in  its  bank,  may  find  itself  pulled  at  for 
cash  just  as  vigorously  as  a  bank  managed  by  private 
enterprise.  This  was  shown  in  August,  1914,  when 
very  large  sums  were  withdrawn  from  the  Post  Office 


168     STATE   MONOPOLY    IN   BANKING 

Savings  Bank  during  the  crisis  which  then  impelled 
many  members  of  the  public  to  hoard  money,  or 
compelled  them  to  take  it  out  of  their  banks  because 
they  did  not  find  that  the  ordinary  system  of 
payment  by  cheque^  was  working  with  its  usual  ease. 
Moreover,  Mr  Webb's  point  about  what  he  calls 
disinterested  management — that  is  to  say,  the 
management  of  banks  by  officers  whose  remuneration 
bears  no  relation  to  the  profit  made  on  each  piece 
of  business  transacted — is  one  of  the  matters  in 
which  English  banking  seems  likely  at  least  to  be 
modified.  Sir  Charles  Addis,  in  the  article  already 
referred  to,  calls  attention  in  a  very  striking  passage 
to  the  efficiency  of  the  administration  of  German 
and  English  banks,  and  makes  a  comparison  between 
the  remuneration  given  to  the  banking  boards  of  the 
two  countries.  The  passage  is  as  follows  : — 

"  Scarcely  second  in  importance  to  the  financial 
strength  of  a  bank  is  the  efficiency  of  its  administration. 
The  German  board  of  direction  is  composed,  to  an  extent 
unknown  in  England,  of  men  possessed  of  professional 
and  technical  knowledge.  No  one  who  has  been  present 
at  a  meeting  of  German  bank  directors  in  Berlin,  when 
some  foreign  enterprise  has  been  under  consideration, 
can  have  failed  to  be  impressed  by  the  animation  with 
which  it  was  discussed,  and  by  the  expert  and  compara- 
tive knowledge  displayed  by  individual  directors  of  the 
enterprise  itself  and  of  the  conditions  prevailing  in  the 
foreign  country  in  which  it  was  proposed  to  undertake  it. 
He  may  have  been  led  to  reflect  ruefully  upon  the 
different  reception  his  project  met  with  in  his  own 
country.  He  will  recall  the  meeting  of  the  London 
board  ;  the  difficulty  of  withdrawing  its  members  even 
temporarily  from  their  country  pursuits  and  their 


THE   PAY   OF   DIRECTORS  169 

obvious  anxiety  to  lose  no  time  in  returning  to  them  ; 
most  of  them  old  men,  many  of  them  long  retired  from 
business  ;  some  of  them  ex-Government  officials  and  the 
like,  who  have  never  been  in  business  ;  a  few  ornamental 
titled  persons ;  only  one  or  two  here  and  there  who 
have  no  train  to  catch  and  are  willing  to  discuss  the 
matter  in  hand  with  attention,  and,  it  may  be,  with 
understanding. 

"  It  would  be  idle  to  pretend  that  a  board  of  this 
kind  constitutes  anything  like  the  nexus  between 
industry  and  finance  which  obtains  in  Germany,  and 
which  is  very  much  to  be  desired  in  this  country.  It 
may  be  that  we  do  not  pay  our  men  enough.  A  London 
director  has  to  be  content  with  an  honorific  position,  a 
fee  of  a  few  hundred  pounds  a  year,  and,  it  must  be 
added,  a  very  exiguous  degree  of  responsibility.  That 
is  not  enough  to  attract  men  in  the  prime  of  life  with 
expert  or  technical  knowledge  of  industry  and  finance, 
who  would  have  to  submit  to  a  reduction  in  the  large 
incomes  they  are  earning  by  the  exercise  of  their  special 
abilities  if  they  were  to  accept  a  seat  on  the  board  of  a 
bank.  There  are  two  things  which  a  good  man,  in  the 
business  sense  of  the  term,  will  not  do  without — pay  and 
responsibility.  Give  him  sufficient  of  the  former,  and 
you  may  saddle  him  with  as  much  of  the  latter  as  you 
like.  You  may  not  always  get  good  men  by  offering 
them  good  pay,  but  you  will  certainly  not  get  them 
without  doing  so.  Apparently  shareholders  are  content 
so  long  as  their  profits  are  not  reduced  by  more  than 
nominal  directors'  fees.  At  a  recent  meeting  of  a  bank 
with  deposits  of  over  £200,000,000  the  proposal  to 
increase  the  directors'  fees  to  £1000  a  year  was  met  by 
the  rejoinder  from  one  of  the  shareholders  present  that 
he  did  not  know  what  the  directors  would  do  with  such 
a  sum. 

"  They  manage  these  things  differently  in  Germany. 
In  the  three  banks  to  which  we  have  already  referred, 
after  payment  by  the  Deutsche  Bank  of  5  per  cent,  of 


170     STATE   MONOPOLY    IN   BANKING 

the  net  profits  to  reserve,  and  of  the  ordinary  dividend 
of  6  per  cent.,  and  by  the  Disconto-Gesellschaft  and  the 
Dresdner  Bank  of  4  per  cent.,  the  directors  receive 
respectively  7  per  cent.,  7J  per  cent.,  and  4  per  cent, 
(the  Disconto's  personally  liable  partners  receive  16  per 
cent.)  out  of  the  remainder.  The  directors  are  bound  by 
law  to  supervise  all  the  details  of  the  bank's  business, 
and  to  keep  themselves  well  informed  as  to  its  general 
policy  and  methods  of  management.  They  are  bound 
by  law  to  exercise  the  caution  of  a  careful  business  man , 
and  are  liable  to  be  sued  for  damages  arising  out  of  the 
crime  or  negligence  of  their  employees.  If  cases  of  this 
kind  are  seldom  brought  to  public  notice,  it  is  not 
because  they  do  not  occur,  but  because  the  directors, 
as  a  rule,  prefer  to  pay  up  for  the  laches  of  their  em- 
ployees, as  they  can  well  afford  to  do  out  of  their  profits, 
rather  than  be  haled  before  the  Court/' 

When  Mr  Webb  comes  to  the  question  of  the 
dangers  resulting  from  monopoly,  he  finds  that  they 
lie  chiefly  in  a  restriction  of  facilities,  and  in  raising 
the  price  exacted  for  them,  and  that  in  both  respects 
the  danger  appears  to  be  great.  There  is,  he  says, 
every  reason  to  expect  that  the  banker,  as  the  nearest 
approach  to  the  "  economic  man,"  will  take  the 
opportunity  of  raising  his  charges  either  by  increasing 
the  frequency  and  the  rate  of  the  commission 
exacted  for  the  keeping  of  a  small  account,  or  by 
reducing  the  rate  of  interest  allowed  on  balances, 
or  adopting  the  common  London  practice  of  refusing 
it  altogether.  "  The  banker,  who  is  not  in  business 
for  his  health,  may  be  expected,  on  this  side  of  his 
enterprise,  to  pursue  the  policy  of  '  charging  all 
that  the  traffic  will  bear/  It  would  probably  pay 
the  banker  actually  to  refuse  small  accounts,  and 


THE   MONOPOLIST    RANSOM         171 

to  penalise  the  employment  of  cheques  for  small 
sums.  This  would  be  a  social  loss." 

With  regard  to  the  other  side  of  his  business, 
lending  to  the  borrowers,  Mr  Webb  thinks  it  need 
not  be  assumed  that  the  monopolist  banker  will 
actually  lend  less,  because  he  will  seek  at  all  times 
to  employ  all  the  capital  or  credit  that  he  can  safely 
dispose  of,  but  Mr  Webb  thinks  that  he  is  likely,  as 
the  result  of  being  relieved  of  the  fear  of  competition; 
to  feel  free  to  be  more  arbitrary  in  his  choice  of 
borrowers,  and  therefore  able  to  indulge  in  dis- 
crimination against  persons  or  kinds  of  business  that 
he  may  dislike ;  that  he  will  raise  his  charges 
generally  for  all  accommodation,  again,  theoretically 
to  "  all  that  the  traffic  will  bear  "  ;  and,  finally,  that 
in  times  of  stress  with  regard  to  all  applicants,  and 
at  all  times  with  regard  to  any  applicant  who  was 
"  in  a  tight  place,"  that  he  will  extort  as  the  price 
of  indispensable  help  a  theoretically  unlimited 
ransom. 

Such  are  the  effects  which  Mr  Webb  fears  from 
the  process  which  has  already  put  the  control  of  the 
greater  part  of  the  banking  facilities  of  England  into 
the  hands  of  five  huge  banks.  He  thinks  that  these 
things  may  happen  long  before  it  is  a  question  of  an 
absolute  monopoly  in  one  hand.  A  monopoly,  he 
says,  may  be  more  or  less  complete,  and  the  economic 
effects  of  monopoly  may  be  produced  to  a  greater 
or  less  degree  at  a  point  far  below  a  complete 
monopolisation  in  a  single  hand.  There  is  much 
truth  in  this  contention  of  his.  Amalgamation  has 
now  come  to  such  a  point  that  every  new  one  not 


172     STATE   MONOPOLY   IN   BANKING 

only  brings  absolute  monopoly  more  closely  in  sight, 
but  increases  the  ease  with  which  agreements  among 
the  huge  banks  might  suffice  to  produce  the  effects 
of  monopoly  without  further  amalgamations.  Mr 
Webb  goes  on  to  argue  that  it  is  impossible  to  stop 
by  legislative  prohibition  or  restriction  the  progress 
towards  economic  monopoly  where  such  progress  is 
financially  advantageous  to  those  concerned,  and 
that  the  only  remedy  ultimately  by  which  the  com- 
munity can  be  protected  from  the  dangers  which 
he  sees  threatening  it  is  for  the  community  to  take 
the  monopoly  into  its  own  hands,  and  so  to  get  rid, 
not  of  the  monopoly,  which,  from  the  standpoint  of 
national  organisation,  he  thinks  is  advantageous, 
but  of  the  motives  leading  to  extortion.  If,  he  says, 
"  no  shareholders  are  in  control  with  their  perpetual 
and  insatiable  desire  for  profit,  there  is  no  induce- 
ment to  take  advantage  of  the  needs  or  helplessness 
of  the  customers  by  restricting  service  or  raising 
prices."  In  this  sentence,  of  course,  he  begs  the 
whole  question  between  the  advantage  of  private 
enterprise  and  of  Socialistic  organisation.  Private 
enterprise  works  for  profit,  and  therefore  makes  as 
much  profit  as  it  can  out  of  its  customers.  It  is, 
therefore,  according  to  Mr  Webb's  argument, 
probable  that  if  private  enterprise  in  banking  is  able 
to  establish  monopoly  it  will  squeeze  the  public  to 
the  point  of  restricting  banking  facilities  and  making 
them  dearer.  No  one  can  deny  that  there  is  some 
truth  in  this  contention,  but,  on  the  other  hand,  it 
may  very  fairly  be  argued  that  modern  business  has 
perceived  the  great  advantages  of  a  big  turn-over  and 


BUREAUCRATIC   MANAGEMENT      173 

small  profits  on  each  transaction.  The  experience 
of  the  great  insurance  companies,  and  of  great 
catering  companies,  and  of  enormous  private  organisa- 
tions such  as  the  Imperial  Tobacco  Company,  has 
shown  the  enormous  advantage  of  providing  cheap 
facilities  to  the  largest  possible  number  of  cus- 
tomers ;  so  that  fears  of  natural  restriction  of 
banking  facilities,  through  monopoly,  if  they  cannot 
be  set  altogether  aside,  are  not  by  any  means  a 
certain  consequence  even  of  the  establishment  of 
monopoly  in  private  enterprise. 

Still  weaker  is  Mr  Webb's  assumption  that  if  the 
interests  of  the  shareholders  with  •"  their  perpetual 
and  insatiable  desire  for  profit "  were  eliminated, 
cheap  and  plentiful  banking  facilities  would  inevit- 
ably result  from  bureaucratic  management.  The 
contrary  has  been  shown  to  be  the  case  in  the 
examples  of  the  Post  Office,  of  the  Telephone  Service, 
and  the  London  Water  Supply.  In  the  case  of  the 
telegraph  and  the  telephones,  the  Government  took 
over  prosperous  businesses,  and  has  managed  them 
at  a  loss.  In  the  matter  of  the  Post  Office  it  is  not 
possible  to  compare  the  Government  with  individual 
enterprise,  but  it  will  generally  be  admitted  that  the 
Telephone  Service  has  by  no  means  been  improved 
since  the  Government  took  it  over.  Mr  Webb  points 
out  that  nationalisation,  whether  of  banks  or  of 
other  forms  of  enterprise,  does  not  necessarily  mean 
government  under  a  Minister  by  a  branch  of  the 
Civil  Service.  But  it  is  impossible  to  ignore  the  fact 
that  as  soon  as  nationalisation  takes  place  those  who 
are  responsible  for  the  management  of  the  enterprise 


174     STATE   MONOPOLY   IN  BANKING 

are  practically  certain  to  develop  the  qualities  and 
idiosyncrasies  of  civil  servants,  which  are  so  unlikely 
to  tend  to  elasticity,  rapidity  and  efficiency  in  busi- 
ness management. 

In  fact,  Mr  Webb  practically  grants  this  point  by 
the  very  interesting  development  he  suggests  by 
which  the  two  chief  functions  of  banking  should  be 
differentiated,  and  one  of  them  should  be  nationalised 
and  the  other  should  remain  in  the  hands  of  private 
enterprise.  He  develops  this  truly  ingenious  sug- 
gestion as  follows : — 

"  Just  as  we  have  (except  for  some  obsolescent 
survivals)  separated  the  function  of  issuing  paper  money 
from  that  of  keeping  current  accounts,  so  we  shall 
separate  the  function  of  keeping  current  accounts  from 
that  of  money-lending.  The  habit  of  the  British  banker 
of  combining  in  one  and  the  same  concern  (a)  the 
essentially  routine  business  of  keeping  current  accounts 
or  receiving  deposits  ;  and  (b)  the  much  more  difficult 
and  hazardous  business  of  lending  capital  to  private 
traders,  is  not  a  necessary  characteristic  of  banking 
organisation  ;  and,'  whilst  possibly  the  most  profitable 
to  the  profit-seeking  banker,  this  combination  may  not 
be  the  most  advantageous  from  the  standpoint  of  the 
community. 

"  It  may  accordingly  be  suggested  that  the  business 
of  banking,  as  understood  in  this  country,  is  destined 
to  be  further  divided  into  two  parts,  one  of  which  is  ripe 
for  immediate  nationalisation,  and  need  no  longer  be 
carried  on  for  private  profit,  whilst  the  other  should  be 
the  sphere  of  a  number  of  separate  and  diversely  spe- 
cialised organisations  catering  for  particular  needs.  The 
whole  of  the  deposit  and  current  account  side  of  banking 
—with  its  services  in  the  way  of  keeping  securities, 
collecting  dividends,  *  meeting  calls,  making  regular 


A  SUGGESTED    DIVISION  175 

payments,  and  carrying  through  the  purchase  and  sale  of 
securities— ought  to  be  united  with  the  Post  Office  and 
Trustee  Savings  Banks  and  the  money  order  and  other 
postal  remittance  business,  and  run  as  a  national  service 
for  the  receipt  and  custody  of  cash,  for  the  utmost 
possible  development  of  the  cheque  system,  and  for  the 
cheapest  possible  organisation  of  remittances.  There  is 
no  longer  any  reason  why  this  important  branch  of  social 
organisation  should  be  abandoned  to  the  profit-maker, 
should  be  made  the  instrument  of  levying  an  unnecessarily 
heavy  toll  on  the  customers  for  the  benefit  of  share- 
holders, and  should  now  be  exposed  to  the  imminent 
danger  of  monopoly. 

"  If  the  receipt  and  custody  of  deposits  and  the 
keeping  of  current  accounts  were  made  a  public  service 
the  Government  might  invest  the  funds  thus  placed  at 
its  disposal  in  a  variety  of  ways.  A  certain  proportion, 
perhaps  corresponding  to  what  is  now  held  as  savings, 
would  be  invested,  as  at  present,  in  Government  securi- 
ties— not  Consols,  but  such  as  are  repayable  at  par  at 
fixed  dates,  including  Treasury  Bills  and  Terminable 
Annuities  ;  and  any  increase  in  this  amount  would,  in 
effect,  release  so  much  capital  for  other  uses,  by  paying 
off  part  of  the  National  Debt.  But  the  bulk  of  the 
amount,  corresponding  with  the  proportion  of  their 
resources  that  the  bankers  now  lend  for  business  pur- 
poses, might  be  advanced,  for  terms  of  varying  duration, 
partly  to  Government  Departments  and  local  authorities 
for  all  their  great  and  rapidly  extending  enterprises, 
formerly  abandoned  to  the  profit-maker  ;  and  partly  to 
a  series  of  financial  concerns,  whose  business  it  should 
be  to  discount  the  bills  and  satisfy  the  requests  for  loans 
of  those  profit-makers  who  now  appeal  to  the  bankers. 
But  these  financial  concerns  should  be  organised,  it  is 
suggested,  very  largely  by  trades  and  industries, 
specialising  in  particular  lines,  and  devoted,  so  far  as 
possible,  to  meeting  the  business  needs  of  the  different 
occupations .  Whether  they  should  be  financial  concerns, 


176     STATE   MONOPOLY   IN   BANKING 

owned  and  directed  by  shareholders,  and  run  for 
their  profit ;  or  whether  they  might  not,  in  some  cases, 
be  owned  and  directed  by  the  great  industrial  associations 
and  combinations  that  the  Government  is  now  promoting 
in  the  various  industries,  and  be  run  for  the  advantage 
of  the  industries  as  wholes,  may  be  a  matter  for  con- 
sideration and  possible  experiment.  In  either  case,  the 
concerns  to  which  the  Government  would  lend  its 
capital  would,  of  course,  have  to  be  of  undoubted  financial 
stability  to  be  secured,  it  may  be,  by  large  uncalled 
capital,  or  by  the  joint  and  several  guarantees  of  a 
numerous  membership  ;  coupled,  possibly,  with  a  charge 
on  the  assets." 

At  first  sight  this  proposal  to  differentiate  the 
functions  of  banking  is  somewhat  startling,  and  one 
wonders  whether  it  could  possibly  work.  On  con- 
sideration, however,  there  seems  to  be  nothing 
actually  impracticable  about  the  scheme.  The 
Government  would  presumably  take  over  all  the 
offices  and  branches  of  the  banks  of  the  country,  and 
would  therein  accept  money  on  deposit  and  current 
account,  making  itself  liable  to  pay  the  money  out 
on  demand  or  at  notice,  as  the  case  may  be,  just  as 
is  done  by  the  existing  banks ;  it  would  hold  the 
necessary  cash  reserve,  and  it  would  apparently 
itself  invest  a  certain  proportion  of  the  money  in 
Government  securities,  as  the  banks  do  at  present. 
The  more  difficult  part  of  the  banking  business,  the 
advancing  of  money  to  borrowing  customers,  it 
would  hand  over  to  financial  institutions,  created  for 
this  purpose  presumably  out  of  the  ashes  of  the 
nationalised  banking  business.  These  institutions 
would  make  themselves  responsible  for  the  lending 


A   DIFFICULTY  177 

side  of  banking,  and  would  obviously,  and  naturally, 
be  allowed  to  make  a  profit  on  this  side  of  the 
business.  In  this  differentiation  Mr  Webb's  in- 
genuity is  seen  at  its  very  best.  He  reserves  for  the 
State  that  part  of  banking  which  is  purely  a  matter 
of  routine,  and  he  leaves  to  private  enterprise  that 
part  of  it  which  requiries  the  elasticity  and  judgment 
and  quickness  in  which  the  average  bureaucrat  is 
most  likely  to  fail.  A  certain  amount  of  friction  may 
easily  arise  from  this  differentiation.  The  interest 
that  the  State  would  be  enabled  to  allow  to  depositors 
would  clearly  depend  to  a  great  extent  on  the  interest 
which  it  would  be  able  to  receive  from  the  financial 
institutions  engaged  in  lending  the  money.  These 
institutions  could  naturally  pay  the  State  interest 
according  to  the  rate  which  they  were  able  to  charge 
their  borrowing  customers,  leaving  themselves  a 
margin  for  profit  and  for  protection  against  the  risk 
that  their  business  would  involve.  It  is  obvious 
that  there  might  at  times  be  considerable  difficulty 
in  adjusting  these  two  different  points  of  view,  and 
anybody  who  knows  anything  about  the  length  of 
time  and  argument  involved  in  inducing  officials  to 
make  up  their  minds  can  only  fear  that  occasional 
jarring  in  this  connecting  link  between  the  two  sides 
of  banking  might  sometimes  produce  effects  which 
would  be  awkward  for  the  industry  of  the  country. 

But  apart  from  this  obvious  difficulty,  can  we 
contemplate  with  equanimity  the  prospect  of  the 
State  monopoly  of  the  ordinary  banking  facilities  as 
they  present  themselves  to  the  man  in  the  street, 
namely,  the  provision  of  bank  branches,  the  use  of 


178     STATE  MONOPOLY   IN   BANKING 

the  cheque  book,  the  custody  of  securities  and  any 
other  articles  that  the  customer  wishes  to  leave  with 
his  bank  ?  At  present  the  ease  and  quickness  with 
which  these  routine  matters  of  banking  are  carried 
out  in  England  are  developed  to  a  point  which  is  the 
envy  of  foreign  visitors.  How  would  it  be  if  every 
cashier  of  every  bank  were  converted  by  the  process 
of  nationalisation  from  the  kindly,  business-like 
human  being  as  we  know  him  into  the  kind  of 
person  who  ministers  to  our  wants  behind  the 
counters  of  the  Post  Office  ?  As  it  is,  we  go  into 
our  bank,  to  present  a  cheque  in  order  to  provide 
ourselves  with  cash  for  the  daily  purposes  of  life ; 
the  cashier  looks  at  the  signature,  recognises  the 
customer,  hands  him  over  the  money.  If  that 
cashier  became  a  Government  official  how  long 
would  it  take  him  to  verify  the  signature,  to  see 
whether  the  customer  really  had  a  balance  to  his 
credit,  and  finally  furnish  him  with  what  he  wanted  ? 
It  is  obvious  that  the  change  suggested  by  Mr  Webb, 
though  it  might  work,  could  only  work  to  the  detri- 
ment of  the  convenience  of  the  public,  and  his 
hopeful  view  that  the  elimination  of  the  profits  of 
the  shareholders  would  mean  that  these  profits 
would  go  into  the  pockets  of  the  community  in  the 
form  of  cheapened  facilities  for  banking  customers  is 
an  ideal  largely  based  on  the  assumption,  that  has 
so  often  been  proved  to  be  incorrect,  that  the  State 
can  do  business  as  well  and  as  cheaply  as  private 
enterprise.  It  is  much  more  likely  that  after  a  few 
years'  time  the  public  would  find  the  business  of 
paying  in  and  getting  out  its  money  a  very  much 


THE   PATIENT  TAXPAYER  179 

more  tedious  and  irritating  process  than  it  is  at 
present,  and  that  the  expenses  of  the  matter  would 
have  grown  to  such  an  extent  that  the  taxpayer 
might  be  called  upon  annually  to  make  good  a 
considerable  loss. 


XIII 

FOREIGN  CAPITAL 

September,  1918 

The  Difference  between  Aims  and  Acts — Should  Foreign  Capital 
be  allowed  in  British  Industry  ? — The  Supremacy  of  London 
and  National  Trade — No  Need  to  fear  German  Capital — 
We  shall  need  all  we  can  get — Foreign  Shares  in  British 
Companies — Can  and  should  the  Disclosure  of  Foreign 
Ownership  be  forced  ? — The  Difficulties  of  the  Problem — 
Aliens  and  British  Shipping — The  Position  of  "  Key  " 
Industries — Freedom  to  Import  and  Export  Capital  our 
Best  Policy. 

MANY  things  that  are  now  happening  must  be  tickling 
the  sardonic  humour  of  the  Muse  of  History.  The 
majority  of  the  civilised  Powers  are  banded  together 
to  overthrow  a  menace  to  civilisation,  carrying  on  a 
war  which,  it  is  hoped,  is  to  produce  a  state  of  things 
in  which  mankind,  purged  of  the  evil  spirits  of  mili- 
tarism and  aggression,  is  to  start  on  a  new  order  of 
co-operation.  At  the  same  time,  while  we  are  en- 
gaged in  fighting  under  banners  with  these  noble 
ideals  inscribed  on  them,  a  large  number  of  citizens 
of  this  country  are  airing  proposals  aimed  at  restric- 
tions upon  our  intercourse  with  other  nations, 
especially  in  the  economic  sphere.  In  last  month's 
issue  of  this  Journal  a  very  interesting  article,  signed 
"  Veritas,"  discussed  the  question  as  to  how  far  it 
was  in  the  power  of  the  Allies  to  make  use  of  the 


QUEER  CROSS-CURRENTS  181 

economic  weapon  against  their  enemies  after  the 
war.     That  such  a  question  should  even  be  mooted 
as  an  end  to  a  war  undertaken  with  these  objects, 
shows  what  a  number  of  queer  cross-currents  are  at 
work  in  the  minds  of  many  of  us  to-day.    But  some 
people  go  much  further  than  that,  and  are  advocating 
policies  by  which  We  should  even  restrict  our  com- 
mercial and  economic  intercourse  with  our  brothers- 
in-arms.     If  the  clamour  for  Imperial  preference  is 
to  have  any  practical  result,  it  can  only  tend  to  culti- 
vate trade  within  the  British  Empire,  protected  by 
an  economic  ring-fence  at  the  expense  of  the  trade 
which,  before  the  war,  we  carried  on  with  our  present 
Allies.     And  a  large  number  of  people  who,  under 
the  cover  of  Imperial  preference,  are  agitating  also 
for  Protection  for  this  country,  would  endeavour  to 
make  the  British  Isles  as  far  as  possible  self-sufficient 
at  the  expense  of  their  trade,  not  only  with  all  their 
present  Allies,  but  even  with  their  brethren  overseas. 
It  is  fortunately  probable  that  the  very  muddle- 
headed  reasoning  which  is  producing  such  curious 
results  as  these,  at  a  time  when  the  world  is  preparing 
to  enter  on  a  period  of  closer  co-operation  and  im- 
proved and  extended  relations  between  one  country 
and  another,  is  confined,  in  fact,  to  a  few  noisy 
people  who  possess  in  a  high  degree  the  faculty  of 
successful  self-advertisement.     I  do  not  believe  that 
the  country  as  a  whole  is  prepared  to  relinquish  the 
economic  policy  which  gave  it  such  an  enormous 
increase    in    material    resources    during    the    past 
century,  and  has  enabled  it  to  stand  forward  as  the 
industrial   and   financial   champion   of   the   Allied 

N 


182  FOREIGN   CAPITAL 

cause  during  the  difficult  early  years  of  the  war. 
Our  rulers  seem  to  be  sitting  very  carefully  on  the 
top  of  the  fence,  waiting  to  see  which  way  the  cat 
is  going  to  jump.  They  have  made  brave  state- 
ments about  abrogating  all  treaties  involving  the 
most-favoured  nation  clause  and  about  adopting  the 
principle  of  Imperial  preference;  but  when  their 
eager  followers  press  them  to  do  something  besides 
talking  about  what  they  are  going  to  do,  they  then 
have  a  tendency  to  return  to  the  domain  of  common- 
sense  and  to  point  out  that  it  is  above  all  desirable 
that  our  economic  policy  should  be  in  unison  with 
that  of  the  United  States. 

Whatever  may  happen  in  the  realm  of  trade  and 
commercial  policy,  it  would  seem  to  be  self-evident 
that  with  regard  to  capital  it  would  be  still  more 
difficult  and  undesirable  to  impose  restrictions  than 
with  regard  to  the  entry  of  goods ;  and  above  all, 
it  seems  to  be  obvious  that  at  any  rate  the  free  entry 
of  capital  into  this  country  is  a  matter  which  should 
be  specially  encouraged  when  the  war  is  over.  At 
that  difficult  period  we  have  to  secure,  if  possible, 
that  British  industry  shall  be  entirely  unhampered 
in  its  endeavours  to  carry  out  the  very  puzzling 
operations  involved  by  transferring  its  energies 
from  war  activities  to  peace  production.  However 
well  the  thing  may  be  managed,  it  will  be  an  exceed- 
ingly difficult  and  complicated  operation.  In  certain 
industries,  especially  in  shipbuilding  and  engineering, 
the  building  trade  and  all  the  allied  enterprises, 
those  who  are  responsible  for  their  efficient  manage- 
ment ought  to  be  able  to  count  upon  a  keen  and 


DIFFICULTIES   AHEAD  183 

widely-spread  demand  for  their  products.  But  in 
many  industries  there  will  necessarily  be  a  good  deal 
of  doubt  as  to  the  kind  of  article  which  the  con- 
suming public  at  home  and  abroad  is  likely  to  want. 
There  will  be  the  great  difficulty  of  sorting  out  the 
right  kind  of  labour,  of  obtaining  the  necessary  raw 
materials,  and  of  getting  the  necessary  credit  and 
capital. 

That  this  huge  problem  can  be  solved,  and  solved 
so  well  that  the  country  can  go  ahead  to  a  great 
period  of  increased  productivity  and  prosperity, 
I  fully  believe ;  but  this  can  only  be  done  if  it  is 
able  to  command  the  most  efficient  co-operation  of 
all  the  various  factors  in  production — if  employers 
put  their  best  brains  and  if  workers  put  their  best 
energy  into  the  business,  and  if  everything  is  done 
to  make  the  whole  machinery  work  with  the  utmost 
possible  smoothness.  One  element  in  the  machinery, 
and  a  highly  important  one,  is  the  question  of  capital. 
During  the  war  the  citizens  of  this  country  have 
been  trained  to  save  and  to  put  their  money  at  the 
disposal  of  the  Government  with  a  success  which 
could  hardly  have  been  expected  when  the  war 
began.  Whether  they  will  continue  to  exercise  the 
same  self-denial  when  the  war  is  over  is  a  very  open 
question.  At  any  rate,  there  can  be  no  doubt  that 
there  will  be  a  tendency  among  a  very  large  number 
of  people  who  have  answered  the  appeal  to  save 
money  for  the  war  to  listen  with  considerable 
indifference  to  any  appeals  that  may  be  made  to 
them  to  save  money  in  order  to  provide  industry 
with  capital.  All  the  capital  that  industry  can  get, 


FOREIGN   CAPITAL 

it  will  certainly  want.  If,  besides  what  it  can  get 
at  home,  it  can  also  get  a  considerable  amount  from 
foreign  countries,  then  its  ability  to  resume  work  on 
a  prosperous  and  profitable  basis  when  the  war  is 
over  will  be  very  greatly  helped.  This  would  seem 
to  be  so  obvious  that  one  might  have  thought  that 
even  a  Government  which  is  believed  to  be  flirting 
with  what  is  called  Tariff  Reform  would  think  twice 
before  it  imposed  any  restrictions  on  the  free  flow 
of  foreign  capital  into  British  industry.  In  so  far 
as  foreigners  lend  to  us  we  shall  be  able  to  import 
raw  materials,  to  be  worked  up  to  the  profit  of 
British  industry,  in  return  for  promises  to  pay — 
a  very  timely  convenience  at  a  critical  moment. 

Nevertheless,  it  would  appear  that  obviousness 
of  the  desirability  of  foreign  capital,  from  whatever 
source  it  comes,  is  by  no  means  evident  to  those 
who  are  now  in  charge  of  the  nation's  destinies. 
At  any  rate,  the  Company  Law  Amendment  Com- 
mittee, which  was  appointed  last  February  "  to 
inquire  what  amendments  are  expedient  in  the 
Companies  Acts,  1908  to  1917,  particularly  having 
regard  to  circumstances  arising  out  of  the  war  and 
of  the  developments  likely  to  arise  on  its  conclusion," 
seems  to  have  thought  it  necessary  to  provide  the 
Government  with  schemes  by  which  alien  capital 
could,  if  the  Government  thought  necessary,  be  kept 
out  of  the  country.  It  was  a  powerful  and  repre- 
sentative Committee,  and  it  is  very  satisfactory  to 
note  that  its  own  view  concerning  the  policy  to  be 
pursued  was  strongly  in  favour  of  freedom.  It 
points  out  in  its  Report  that  the  question  which 


A    CURIOUS    REASON  185 

lay  in  the  forefront  of  its  investigations  was  that  of 
the  employment  of  foreign  capital  in  British  in- 
dustries. On  the  preliminary  question  of  whether 
it  was  desirable  that  foreign  capital  should  be 
freely  attracted  to  this  country,  there  was  little,  if 
any,  difference  of  opinion.  For  this  very  sensible 
conclusion  the  Committee  gives  rather  a  curious 
reason.  It  states  that  the  maintenance  of  London 
as  the  financial  centre  of  the  world  is  of  the  first 
importance  for  the  well-being  of  the  Empire,  and 
that  anything  which  could  impede  or  restrict  the 
free  flow  of  capital  to  the  United  Kingdom  would, 
in  itself,  be  prejudicial  to  Imperial  interests. 

Now,  of  course,  it  is  entirely  true  that  the  main- 
tenance of  London  as  a  financial  centre  is  very 
important,  but  I  venture  to  think  that  those  who 
are  most  jealous  concerning  the  prestige  of  London 
and  the  importance  of  its  financial  operations  would 
say  that  it  ranks  only  second  to  the  industrial 
efficiency  of  the  country  as  a  whole  and  cannot,  in 
fact,  be  long  maintained  unless  there  is  that  indus- 
trial efficiency  behind  it,  providing  a  surplus  out  of 
which  London  may  be  able  to  finance  the  world  and 
so,  incidentally,  and  as  a  side  issue,  be  to  a  great 
extent  helped  by  foreign  capital  to  do  so.  It  is 
surely  evident  that  a  financial  supremacy  which  was 
based  merely  on  a  jobbing  business,  gathering  in 
capital  from  one  nation  and  lending  it  to  another, 
would  be  an  extremely  precarious  and  artificial 
structure,  the  continuance  of  which  could  not  be 
relied  on  for  many  decades.  Finance  can  only 
flourish  healthily  and  wholesomely  in  a  country 


i86  FOREIGN   CAPITAL 

which  produces  a  considerable  surplus  of  goods  and 
services  which  it  is  prepared  to  place  at  the  disposal 
of  the  world.  Owing  to  the  possession  of  this  surplus 
it  becomes  a  market  in  capital,  and  so  gets  a  con- 
siderable jobbing  business,  but  the  backbone  and 
foundation  of  its  position  must  be,  in  the  end, 
industrial  activity  in  the  widest  sense  of  the  word. 
It  therefore  seems  that  the  Committee's  argument 
that  the  free  flow  of  capital  is  essential  to  the 
maintenance  of  London's  finance  might  have  been 
reinforced  by  the  very  much  stronger  one  that  it  is 
essential  to  the  recuperative  power  of  British 
industry,  which  will  need  every  assistance  it  can 
get  in  order  to  re-establish  itself  after  the  war. 

The  Committee  points  out  that  "  any  legislation 
which  would  tend  to  impede  or  restrict  the  free  flow 
of  capital  here  by  imposing  restrictions  or  creating 
impediments  ought  to  be  jealously  watched,  lest  in 
the  endeavour  to  prevent  what  has  come  to  be  called 
'  peaceful  penetration '  the  normal  course  of  com- 
mercial development  should  be  arrested,"  and  it  goes 
on  to  observe  that  at  the  end  of  the  war,  "  if  it  should 
be  concluded  upon  such  terms  as  we  hope  and  antici- 
pate," it  is  not  likely  that  our  present  enemies  will 
be  in  possession  of  capital  looking  for  employment 
abroad.  This  is  certainly  very  true.  By  the  time 
the  Germans  have  made  the  reparations,  which  will 
involve  so  much  rebuilding  in  Belgium  and  in  the 
parts  of  France  that  they  have  overrun  and  swept 
clean  of  industrial  plant,  and  have  in  other  respects 
made  good  the  damage  which  their  ruthless  and 
uncivilised  methods  of  warfare  have  inflicted,  not 


FEAR  OF  GERMANY  187 

only  on  their  enemies,  but  on  neutrals,  it  does  not 
seem  likely  that  they  will  have  much  to  spare  for 
capital  expansion  in  foreign  countries,  especially 
when  we  consider  how  many  problems  of  reconstruc- 
tion they  will  themselves  have  to  face  at  home. 
'  To  impose  restrictions  upon  the  influx  of  capital," 
the  Report  continues,  "  aimed  at  our  present  enemies, 
with  the  result  of  deterring  the  flow  of  capital  from 
(say)  America,  would  be  a  policy  highly  injurious  to 
the  economic  recovery  and  renewed  prosperity  of 
this  country  after  the  war.  For  these  reasons  we 
are  of  opinion  that  in  all  amendments  of  the  law 
falling  within  the  scope  of  our  reference,  the  expe- 
diency of  the  attraction  of  foreign  capital  should  be 
steadily  borne  in  mind. ' '  The  Committee  thus  seems 
to  have  thought  it  necessary  to  administer  comfort 
to  anybody  who  might  fear  that  the  unrestricted 
flow  of  capital  from  abroad  might  involve  this 
country  in  the  terrible  danger  of  being  assisted  in  its 
industrial  recovery  by  capital  from  Germany. 

If  there  were,  in  fact,  any  possibility  of  this 
assistance  being  given,  it  would  seem  to  be  extremely 
short-sighted  not  to  allow  British  industry  to  make 
use  of  it.  In  the  matter  of  "  peaceful  penetration," 
we  have  ourselves  in  the  past  done  perhaps  as  much 
as  all  the  rest  of  the  countries  of  the  world  put 
together,  with  the  result  that  we  have  greatly 
stimulated  the  development  of  economic  prosperity 
all  over  the  world  ;  in  fact,  it  may  be  argued  that  the 
great  progress  made  in  the  last  century  in  mant' 
power  over  the  forces  of  Nature  has  been  to  a  greas 
extent  due  to  the  freedom  with  which  we  invested 


i88  FOREIGN    CAPITAL 

capital  abroad  and  opened  a  free  market  to  the  pro- 
ducts of  all  other  countries.  At  a  time  when,  owing 
to  exceptional  circumstances,  we  ourselves  happen 
to  be  in  need  of  capital,  it  would  appear  to  be  an 
extremely  short-sighted  policy  to  refuse  to  admit  it, 
wherever  it  came  from.  We  have  excellent  reason 
to  known  that,  when  capital  is  once  invested  in  a 
foreign  country,  it  is  largely  in  the  power  of  the 
inhabitants  and  Government  of  that  country  to 
control  its  working.  Any  foreigner,  even  an  enemy, 
who  set  up  a  factory  in  England  after  the  war  would 
be  doing  just  the  very  thing  which  we  most  of  all 
want  to  be  done,  namely,  setting  the  wheels  of 
industry  going,  relieving  the  labour  market  from 
a  possible  glut  after  demobilisation,  and  helping 
that  difficult  stage  of  transition  from  war  work  to 
peace  work. 

The  Committee,  however,  considers  that  "  at  the 
root  of  the  whole  matter  lies  a  question  which  is  not 
one  of  Company  Law  amendment  at  all,  but  one 
of  high  political  and  economic  policy."  It  does  not 
fall  within  its  province  "  to  inquire  whether  the 
traditional  policy  of  this  country  to  admit  and 
welcome  all  who  seek  our  shores  and  submit  them- 
selves loyally  to  our  laws  ought,  in  the  case  of  some 
and  what  aliens,  to  be  revised  "  ;  or  whether  dis- 
crimination ought  to  be  made  between  an  alien  of 
one  nationality  and  an  alien  of  another.  "  As 
regards  aliens  who  are  now  our  enemies,  it  may  be 
that  the  British  Empire  may  adopt  the  policy  that 
a  special  stigma  ought  to  be  attached  to  the  German, 
and  that  neither  as  an  individual,  nor  as  a  firm,  nor 


ALIEN   ACTIVITY  189 

as  a  corporation,  ought  he,  for  a  time  at  any  rate, 
to  be  admitted  to  commercial  fellowship  or  to  any 
fellowship  with  the  civilised  nations  of  the  world." 
It  need  not  be  said  that  any  attempt  to  apply  this 
stigma  in  practice  would  be  extremely  difficult  to 
carry  out,  would  involve  all  kinds  of  difficulties  and 
complications  in  trade  and  in  finance,  and  that  the 
threat  of  it  is  more  likely  than  anything  else  to 
stiffen  the  resistance  of  the  Germans  and  to  force 
them  to  rely  on  their  militarist  leaders  as  their  only 
hope  of  salvation.  However,  the  Committee  points 
out  that  recent  legislation  shows  a  desire  to  ascertain 
and  record  the  extent  to  which  aliens  are  active  in 
commerce  here,  and  thinks  it  necessary  to  make 
provision  to  meet  the  requirements  of  the  Govern- 
ment in  case  our  rulers  should  decide  to  impose  the 
restrictions  which  its  own  common-sense  shows  it 
are  so  undesirable. 

If,  it  says,  foreign  capital  is  to  be  attracted  here, 
it  must  be  represented  either  by  shares  or  by  deben- 
tures. "  The  question,  therefore,  is  whether  restric- 
tions ought  to  be  imposed  upon  the  extent  to  which 
the  control  of  the  company  shall  be  allowed  to  reside 
in  aliens,  either  by  reason  of  their  holding  a  majority 
of  the  shares,  or  of  the  debentures,  or  by  reason  of 
their  obtaining  a  majority  upon  the  Board  of 
Directors ;  and,  if  so,  how  disclosure  of  their  alien 
character  is  to  be  enforced."  It  goes  on  to  point  out 
the  great  difficulties  which  present  themselves  in  the 
way  of  securing  disclosure  of  nationality  and  ensuring 
that  aliens  shall  not  command  the  control.  "  The 
law  of  trusts,"  it  says,  "  is  firmly  established  in  this 


I.QO  FOREIGN   CAPITAL 

country.  If  A.  be  the  registered  holder  of  a  share, 
he  is  not  necessarily  the  beneficial  owner.  He  may 
be  a  trustee  for  B.  To  enact  that  the  registered 
holder  must  be  a  British  subject  effects  nothing,  for 
B.  may  be  an  alien  and  an  enemy.  Suppose, 
however,  that  you  enact  that  A.,  when  his  share  is 
allotted  or  transferred  to  him,  shall  make  a  declara- 
tion that  he  holds  in  his  own  right,  or  that  he  holds 
in  trust  for  B.,  and  that  both  A.  and  B.  are  British 
subjects.  There  is  nothing  to  prevent  the  creation 
of  a  new  trust  the  next  day,  under  which  C.,  an  alien 
enemy,  will  be  the  person  beneficially  entitled. 
Further,  at  the  earlier  date  (the  date  of  allotment  or 
transfer)  the  facts  may  be  that  A.  (a  British  subject) 
is  trustee  for  B.  (a  British  subject),  but  that  B. 
(unknown  to  A.)  is  a  trustee  for  C.,  an  alien  enemy. 
The  fact  that  B.  is  trustee  for  C.  would  be  purposely 
withheld  from  A.,  and  A.'s  declaration  that  he  was 
simply  trustee  for  B.  would  be  perfectly  true.  To 
require  that  A.  should  make  a  declaration  at  short 
intervals  (say  once  a  month),  or  that  A.,  B.,  C,,  and 
so  on,  should  all  make  declarations  would  be,  of 
course,  so  harassing  and  so  detrimental  as  to  be,  as  a 
matter  of  business,  impossible.  The  only  effectual 
way  of  dealing  with  the  matter  would  be  by  a  pro- 
vision that  the  share  might  be  forfeited,  or  might  be 
sold  and  the  proceeds  paid  to  the  owner,  if  an  alien 
should  be,  or  become  beneficially  entitled  to  or 
interested  in  the  share.  Such  a  provision  does  not 
in  the  general  case  commend  itself  to  us  as  practical 
or  desirable."  Any  endeavour  to  control  the 
nationality  of  the  Board  of  Directors  produces 


THE    ELUSIVE   ALIEN  191 

similar  difficulties.  It  is  easy  to  ensure  that  they 
shall  be  all,  or  a  majority  of  them,  British  subjects, 
but  there  is  no  means  of  ensuring  that  their  actions 
shall  not  be  controlled  by  aliens  whose  nationality  is 
not  disclosed. 

Having  pointed  out  these  difficulties,  which  seem 
in  effect  to  reduce  the  whole  question  to  the  domain 
of  farce,  the  Committee  goes  on  to  inquire  whether  it 
is  desirable  to  legislate  in  the  direction  of  forbidding 
the  employment  of  foreign  capital  here  in  Joint 
Stock  Companies,  unless  : — 

(1)  There  is  disclosure  of  the  alien  character  of  the 

foreign  owner ; 

(2)  Not  more  than  a  certain  proportion  of  the 

Company's  shares  are  held  by  aliens  ; 

(3)  The  Board,  or  a  certain  proportion  of  the 

Board,  shall  not  be  alien ; 

and,  further,  whether  it  is  desirable  to  discriminate 
between  one  alien  and  another,  and  to  legislate  in 
that  direction  in  the  case  of  certain  aliens  and  not 
of  others. 

In  answering  these  questions,  the  Committee 
decided  that  it  was  necessary  to  discriminate  between 
certain  classes  of  companies — Class  A  being  com- 
panies in  general,  Class  B.  being  companies  owning 
British  shipping,  and  Class  C  companies  engaged  in 
"  key  "  industries.  With  regard  to  companies  in 
Class  A,  they  recommend  that  no  restrictions  at  all 
be  imposed,  but,  nevertheless,  they  elaborate  a 
scheme  of  enforcing  disclosure  of  alien  ownership  if 
that  policy  seems  to  the  legislature  to  be  right.  This 
scheme,  the  Committee  admits,  is  necessarily  detailed 


192  FOREIGN   CAPITAL 

and  laborious ;  it  puts  difficulties  in  the  way  of 
investment  in  English  securities,  whether  by  British 
subject  or  alien.  It  would  supply,  no  doubt,  to  the 
Board  of  Trade  useful  information  as  to  the  extent 
of  foreign  investment  in  English  industries,  but  the 
price  paid  for  this  advantage  would,  in  the  Com- 
mittee's opinion,  be  too  great.  If  adopted,  the 
scheme  could  be  evaded.  And,  with  regard  to 
companies  in  general,  the  Committee's  recommenda- 
tions go  tHe  length  of  allowing  complete  freedom  as 
to  the  nationality  both  of  the  corporators  and  of  the 
Board.  They  would  allow,  for  instance,  American 
capitalists  to  come  here  and  establish  themselves  as  a 
British  corporation  in  which  all  the  corporators  and 
all  the  directors  were  American,  and  so  with  every 
other  nationality.  They  would  make  no  discrimina- 
tion between  aliens  of  different  nationality,  for,  if 
there  is  to  be  such  discrimination,  there  must  be  the 
machinery  of  disclosure,  involving  a  deterrent  effect 
and  acting  prejudicially  in  the  case  of  all  investors. 
But,  if  any  such  discrimination  were  adopted,  the 
Committee  thinks  that  at  any  rate  it  should  be 
limited  to  some  short  period,  say,  three  or  five  years 
after  the  end  of  the  war. 

If,  however,  the  legislature  should  decide  upon 
the  necessity  of  disclosure  of  alien  ownership,  the 
Committee  draws  up  the  following  scheme  for 
securing  it  in  Paragraph  15  of  its  Report  : 

15.  For  reasons  already  given,  it  is  not  possible 
efficiently  to  ensure  full  disclosure,  but  the  following 
suggestions  would,  in  the  absence  of  deliberate  and 
intentional  evasion  (which  would  be  quite  possible),  meet 


DEVICE  FOR  DISCLOSURE          193 

the  point  and  in  the  large  majority  of  cases  would  disclose 
the  extent  of  alien  interests  and  control : — 

(a)  Every  allottee  of  shares  upon  allotment  and  every 

transferee  upon  transfer  should  be  required  to 
make  a  declaration  disclosing  his  nationality 
and  whether  he  is  the  beneficial  owner  of  the 
shares,  and,  if  not,  for  whom  he  is  trustee,  and 
what  is  the  nationality  of  the  beneficial  owner, 
and  should  undertake  within  a  limited  time, 
after  any  change  in  the  beneficial  ownership,  to 
communicate  the  new  facts  to  the  company. 
In  default  of  compliance  with  the  above,  the 
shares  should,  at  the  option  of  the  company, 
either  (i)  be  liable  to  sale  by  the  company  and 
the  holder  be  entitled  only  to  the  proceeds  ;  or 
(2)  be  liable  to  forfeiture  and  the  holder  be 
entitled  to  receive  payment  from  the  company 
of  10  per  cent,  less  than  the  market  value  of  the 
share,  or  if  there  be  no  market  value,  then 
10  per  cent,  less  than  the  value  at  which  the 
share  would  be  taken  for  ad  valorem  stamp  duty 
if  it  were  the  subject  of  transfer.  In  case  the 
company  made  default  in  exercising  its  power, 
the  Board  of  Trade  should  be  authorised  to 
require  the  above  sale  to  be  made. 

(b)  Every  director,  upon  coming  into  office,  should  be 

required  to  make  a  declaration  disclosing  his 
nationality  and  stating  whether  in  his  office 
he  is  wholly  free  from  the  control  or  influence 
of  any  alien,  and  if  he  is  not  so  free,  stating  by 
whose  directions  or  under  whose  control  or 
influence  he  is  to  act  and  what  is  the  nationality 
of  that  person,  and  should  undertake  within  a 
limited  time  after  any  change  in  that  state  of 
things  to  communicate  the  facts  to  the  Board 
and  procure  a  statement  of  the  facts  to  be 
entered  in  the  Board  minutes.  Any  breach  of 
these  obligations  to  be  visited  with  a  penalty 
which  should  be  severe. 


194  FOREIGN   CAPITAL 

(c)  The  company  should  be  required  to  enter  in  the 
register  of  members,  against  the  name  of  every 
registered  member,  his  nationality  as  disclosed 
by  the  declaration.  In  the  case  where  the 
registered  member  is  not  the  beneficial  owner, 
the  company  should  be  required  to  record,  not 
in  the  register,  but  in  another  book,  the  nation- 
ality of  the  beneficial  owner  as  disclosed  by  the 
declaration,  and,  as  regards  the  latter  book,  to 
record  the  nationality  of  any  new  beneficial 
owner  when  and  as  disclosed  by  the  registered 
member.  These  particulars  should  be  required 
to  be  included  in  the  annual  list  under  Section  26 
of  the  Act  of  1908.  That  list  would  thus  become 
not  a  list  of  members  only,  but  a  list  of  members 
with  the  addition  of  beneficial  owners.  The 
company  should,  further,  be  required  to  add  to 
the  annual  list  a  summary  of  the  result  as 
regards  nationality  showing  (i)  as  regards 
registered  members,  how  many  are  British 
subjects  and  how  many  shares  they  hold,  and 
how  many  are  aliens  and  how  many  shares  they 
hold,  subdividing  the  number  of  the  aliens  and 
their  holdings  under  their  respective  nation- 
alities;  and  (2)  as  regards  the  registered 
members  who  are  British  subjects :  (a)  how- 
many  of  them  are  the  beneficial  owners  and 
how  many  shares  they  hold,  and  (6)  as  regards 
the  rest,  what  are  the  nationalities  and  holdings 
of  the  beneficial  owners. 

With  regard  to  companies  owning  British 
shipping,  the  Committee  is  satisfied  that  the  total 
exclusion  of  aliens  from  ownership  of  British  ships 
is  not  essential  for  national  safety  and  is  not  ex- 
pedient. It  therefore  considers  that  in  these  com- 
panies it  will  be  sufficient  to  ensure  that  not  more 


SHIPPING   AND   "KEY"   COMPANIES  195 

than  20  per  cent,  of  the  power  of  control  should  be  in 
alien  hands.  It  thinks  that  there  should  be  this 
limit  of  20  per  cent.,  that  not  more  than  20  per  cent, 
of  the  share  capital  should  be  held  by  aliens,  and  that 
those  shares  should  carry  no  more  than  20  per  cent, 
of  the  voting  power.  Alternatively,  it  considers  that 
the  alien  holdings  should  carry  no  vote  at  all,  but  that 
is  a  point  of  detail  deserving  further  consideration. 
It  follows  that  in  this  class  there  must,  in  the  opinion 
of  the  Committee,  be  disclosure  of  nationality,  which 
should  be  enforced  in  the  manner  detailed  above, 
which,  on  its  own  admission,  is  not  proof  against 
deliberate  evasion. 

With  regard  to  companies  carrying  on  "  key  " 
industries,  a  very  complicated  system  is  recom- 
mended. In  the  first  place,  the  question  whether  a 
company  is  one  to  carry  on  a  "  key  "  industry  would 
seldom  or  never  arise  at  the  time  of  its  registration. 
The  modern  Memorandum  of  Association  includes  so 
many  things  that  a  "  key  "  industry  might  be  within 
the  powers  of  almost  any  company.  The  question 
would  thus  arise  when  the  company  has  got  to  work. 
And  so  the  Committee  thinks  that  the  Board  of 
Trade  should  be  empowered  at  any  time  to  make  an 
inquiry  whether  any  company  is  carrying  on  a  "  key  " 
industry  and,  if  it  finds  that  it  is,  then  the  company 
shall,  at  the  direction  of  the  Board  of  Trade,  require 
every  registered  member  to  make  a  declaration  such 
as,  under  the  disclosure  procedure  already  described, 
he  would  have  had  to  make  if  he  were  at  the  date  of 
the  notice  about  to  receive  an  allotment  or  become  a 
transferee.  Further,  the  holders  of  share  warrants 


196  FOREIGN   CAPITAL 

to  bearer  would  be  required  to  surrender  their 
warrants  for  cancellation  and  have  their  names 
entered  in  the  register,  and  all  subsequent  allottees 
and  transferees  would  be  subject  to  the  obligation  of 
disclosure,  as  already  described,  and  the  limits  of 
20  per  cent,  recommended  in  the  case  of  merchant 
shipping  would  then  be  made  applicable.  Under  the 
system  of  disclosure  it  follows  that  bearer  shares  are 
impossible,  but,  if  disclosure  be  negatived,  the  opinion 
of  the  Committee  is  in  favour  of  the  maintenance  of 
the  bearer  share. 

It  should  be  mentioned  that  one  member  of  the 
Committee  produced  a  reservation  strongly  com- 
bating even  the  very  moderate  views  expressed  by 
the  Committee  on  the  subject  of  British  shipping  and 
"  key "  industries.  It  should  be  noted,  however, 
that  he  attended  very  few  meetings  of  the  Com- 
mittee. He  points  out  that,  with  regard  to  the 
registration  of  ships  as  British  when  they  are  owned 
by  a  company  which  has  alien  shareholders,  "it  is 
not  usually  a  question  of  permitting  a  ship  which 
would  in  any  case  be  British  to  be  under  the  control 
of  aliens ;  the  question  is  whether,  if  a  number  of 
persons,  some  or  all  of  whom  are  aliens,  own  a  ship, 
they  should  be  permitted  to  register  it  as  a  British 
ship  by  forming  themselves  into  a  British  company 
and  establishing  an  office  in  the  British  Dominions. 
If,"  he  observes,  "  they  were  not  allowed  to  do  so 
they  would  still  own  the  ship,  but  register  it  as  a 
foreign  ship  in  some  other  country.  It  appears  that 
a  number  of  ships  were  registered  here  before  the  war 
by  companies  with  alien  shareholders  (some  even 


THE    MORAL  197 

with  enemy  shareholders).  They  were  managed  in 
this  country ;  the  profits  earned  by  them  were  sub- 
ject to  our  taxation  ;  they  were  obliged  to  conform 
to  the  regulations  of  our  Merchant  Shipping  Acts  ; 
they  carried  officers  and  men  who  were  members  of 
the  Royal  Naval  Reserve ;  on  the  outbreak  of  war 
our  Government  was  able  to  requisition  the  ships 
owing  to  their  British  registration  and  without  regard 
to  the  nationality  of  the  shareholders  in  the  com- 
panies owning  them. ' '  It  appears  to  this  recalcitrant 
member — and  there  is  much  to  be  said  for  his  view — 
that  all  these  consequences  have  been  highly  advan- 
tageous to  this  country.  On  the  subject  of  "  key  " 
industries  he  is  equally  unconvinced.  It  appears  to 
him  that "  the  important  thing  is  to  get  the  industries 
established  in  this  country,  and  that  the  question 
of  their  ownership  is  of  secondary  consequence/' 

It  is  very  satisfactory  to  note,  in  view  of  wild  talk 
that  has  lately  been  current  with  regard  to  restric- 
tions on  our  power  to  export  capital,  that  the  Com- 
mittee has  not  a  word  to  say  for  any  continuance, 
after  the  war,  of  the  supervision  now  exercised  over 
new  issues.  The  restrictions  which  it  did  recom- 
mend, while  admitting  their  futility,  on  imports  of 
capital  into  our  shipping  and  "  key  "  industries  were 
evidently  based  on  fears  of  possible  war  in  future. 
The  moral  is  that  this  war  has  to  be  brought  to  such 
an  end  that  war  and  its  barbarisms  shall  be  "  spurlos 
versenkt,"  and  that  humanity  shall  be  able  to  go 
about  its  business  unimpeded  by  all  the  stupid 
bothers  and  complications  that  arise  from  its 
possibility. 


XIV 

NATIONAL  GUILDS 

October,  1918 

The  Present  Economic  Structure — Its  Weaknesses  and  Injustices 
— Were  things  ever  better  ? — The  Aim  of  State  Socialism — 
A  Rival  Theory — The  New  Movement  of  Guild  Socialism — 
Its  Doctrines  and  Assumptions — Payment  "  as  Human 
Beings  " — The  "  Degradation  "  of  earning  Wages — Produc- 
tion irrespective  of  Demand — Is  that  the  Real  Meaning  of 
Freedom  ? — The  Old  Evils  under  a  New  Name — A  Con- 
ceivably Practical  Scheme  for  some  other  World. 

MOST  people  will  admit  that  there  are  many  glaring 
faults  in  the  present  economic  structure  of  society. 
Wealth  has  been  increased  at  an  exhilarating  pace 
during  the  last  century,  and  yet  the  war  has  shown 
us  that  we  had  not  nearly  realised  how  great  is  the 
productive  power  of  a  nation  when  it  is  in  earnest, 
and  that  the  pace  at  which  wealth  has  been  multiplied 
may,  if  we  make  the  right  use  of  our  plant  and 
experience,  be  very  greatly  quickened  in  the  next. 
The  great  increase  in  wealth  that  has  taken  place  has 
been  certainly  accompanied  by  some  improvement 
in  its  distribution  ;  but  it  must  be  admitted  that  in 
this  respect  we  are  very  far  from  satisfactory  results, 
and  that  a  system  which  produces  bloated  luxury 
plus  extreme  boredom  at  one  end  of  the  scale  and 
destitution  and  despair  at  the  other,  can  hardly  be 
called  the  last  word,  or  even  the  first,  in  civilisation. 


THE    MEDIAEVAL   CONQUEROR       199 

The  career  has  been  opened,  more  or  less,  to  talent. 
But  the  handicap  is  so  uneven  and  capricious  that 
only  exceptional  talent  or  exceptional  luck  can  fight 
its  way  from  the  bottom  to  the  top,  the  process  by 
which  it  does  so  is  not  always  altogether  edifying, 
and  the  result,  when  the  thing  has  been  done,  is  not 
always  entirely  satisfactory  either  to  the  victorious 
individual  or  to  the  community  at  whose  expense  he 
has  won  his  spoils.  The  prize  of  victory  is  wealth 
and  buying  power,  and  the  means  to  victory  is,  in 
the  main,  providing  an  ignorant  and  gullible  public 
with  some  article  or  service  that  it  wants  or  can  be 
persuaded  to  believe  that  it  wants.  The  kind  of 
person  that  is  most  successful  in  winning  this  kind  of 
victory  is  not  always  one  who  is  likely  to  make  the 
best  possible  use  of  the  enormous  power  that  wealth 
now  puts  into  the  hands  of  its  owner. 

Those  who  are  fond  of  amusing  themselves  by 
looking  back,  through  rose-coloured  spectacles,  at 
more  or  less  imaginary  pictures  of  the  good  old 
mediaeval  times,  can  make  out  a  fair  case  for  the 
argument  that  in  those  days  the  spoils  were  won  by 
a  better  kind  of  conqueror,  who  was  likely  to  make 
a  better  use  of  his  victory.  In  times  when  man  was 
chiefly  a  predatory  animal  and  the  way  to  success  in 
life  was  by  military  prowess,  readiness  in  attack  and 
a  downright  stroke  in  defence,  it  is  easy  to  fancy  that 
the  folk  who  came  to  the  top  of  the  world,  or  main- 
tained a  position  there,  were  necessarily  possessed  of 
courage  and  bodily  vigour  and  of  all  the  rough 
virtues  associated  with  the  ideal  of  chivalry.  Per- 
haps it  was  so  in  some  cases,  and  there  is  certainly 


200  NATIONAL   GUILDS 

something  more  romantic  about  the  career  of  a  man 
who  fought  his  way  to  success  than  about  that  of  the 
fortunate  speculator  in  production  or  trade,  to  say 
nothing  of  the  lucky  gambler  who  can  in  these  times 
found  a  fortune  on  market  tips  in  the  Kaffir  circus 
or  the  industrial  "  penny  bazaar."  Nevertheless, 
it  is  likely  enough  that  even  in  the  best  of  the 
mediaeval  days  success  was  not  only  to  the  strong 
and  brave,  but  also  went  often  to  the  cunning, 
fawning  schemer  who  pulled  the  brawny  leg  of  the 
burly  fighting-man.  However  that  may  be,  there 
can  be  no  doubt  that  now  the  prizes  of  fortune  often 
go  to  those  who  cannot  be  trusted  to  make  good  use 
of  them  or  even  to  enjoy  them,  that  Mr  Wells's  great 
satire  on  our  financial  upstarts — "  Tono-Bungay  " 
has  plenty  of  truth  in  it,  and  that  our  present  system, 
by  its  shocking  waste  of  millions  of  good  brains  that 
never  get  a  chance  of  development,  is  an  economic 
blunder  as  well  as  an  injustice  that  calls  for  remedy. 
This  being  so,  it  is  the  business  of  all  who  want 
to  see  things  made  better  to  examine  with  most 
respectful  attention  any  schemes  that  are  put  forward 
for  the  reconstruction  of  society,  however  strongly 
we  may  feel  that  real  improvement  is  only  to  be  got, 
not  by  reconstructing  society  but  by  improving  the 
bodily  and  mental  health  and  efficiency  of  its 
members.  The  advocates  of  Socialism  have  had  a 
patient  and  interested  hearing  for  many  decades, 
except  among  those  to  whom  anything  new  is 
necessarily  anathema.  There  was  something  attrac- 
tive in  the  notion  that  if  all  men  worked  for  the  good 
of  the  community  and  not  for  their  own  individual 


ATTRACTIONS   AND  MISGIVINGS     201 

profit,  the  work  of  the  world  might  be  done  much 
better,  because  all  the  waste  of  competition  and 
advertisement  would  be  cut  out,  machinery  would 
be  given  its  full  chance  because  it  would  be  making 
work  easier  instead  of  causing  unemployment,  and  a 
greater  output,  more  evenly  distributed,  would 
enable  the  nation  to  breed  a  race,  each  generation  of 
which  would  come  nearer  to  perfection.  So  splendid 
if  true  ;  but  one  always  felt  misgivings  as  to  whether 
the  general  standard  of  work  might  not  deteriorate 
instead  of  improve  if  the  stimulus  of  individual  gain 
were  withdrawn ;  and  that  the  net  result  might 
probably  be  a  diminished  output  consumed  by  a 
discontented  people,  less  happy  under  a  possibly 
stupid  and  short-sighted  bureaucracy,  than  it  is  now 
when  the  chances  of  life  at  least  give  it  the  glorious 
uncertainty  of  cricket.  Since  the  war  our  experi- 
ences of  official  control,  even  when  working  on  a 
nation  trained  in  individual  initiative,  have  increased 
those  misgivings  manifold ;  and  hundreds  of  people 
who  were  Socialistically  inclined  in  1914  will  now 
say  that  any  system  which  handed  over  the  regula- 
tion of  production  and  distribution  to  the  State 
could  end  only  in  disaster,  unless  we  could  first  build 
up  a  new  machinery  of  State  and  a  new  people  for  it 
to  work  on. 

Partly,  perhaps,  owing  to  this  discredit  into  which 
the  doctrines  of  State  Socialism  have  lately  fallen, 
increasing  attention  has  been  given  to  a  body  of 
theory  that  was  already  active  before  the  war  and 
advocates  a  system  of  what  it  calls  Guild  Socialism, 
under  which  industry  is  to  be  worked  by  National 


202  NATIONAL  GUILDS 

Guilds,  embracing  all  the  workers,  both  by  brain  and 
by  hand,  in  the  various  kinds  of  production.     Its 
advocates  are,  as  far  as  I  have  been  able  to  study 
their  pronouncements,   decidedly  hostile  to  State 
Socialism  and  needlessly  rude  to  some  of  its  most 
prominent   preachers,  such  as  Mr  and   Mrs  Webb, 
who  at  least  merit  the  respect  due  to  those  who  have 
given  lives  of  work  to  supporting  a  cause  which  they 
believe  to  be  sound  and  in  the  best  interests  of 
mankind.     But  in  spite  of  their  chronic  and  some- 
times ill-mannered  facetiousness  at  the  expense  of 
State    Socialism    and    its    advocates,    the    Guild 
Socialists,  as  we  shall  see,  have  to  rely  on  State 
control  for  very  important  wheels  in  their  machinery 
and  leave  gaps  in  it  which,  as  far  as  disinterested 
observers  can  see,  can  only  be  filled  by  still  further 
help  from  the  discredited  State.     It  is  no  disparage- 
ment of  the  efforts  of  these  writers  and  thinkers  to 
say  that  their  sketch  of  the  system  that  they  hope  to 
see  built  up  is  somewhat  hazy.     That  is  inevitable. 
They  are  groping  towards  a  new  social  and  economic 
order  which,  in  their  hope  and  belief,  would  be  an 
improvement.     To  expect  them  to  work  it  out  in 
every  detail  would  be  to  ask  them  to  commit  an 
absurdity.     The  thing  would  have  to  grow  as  it 
developed,  and  we  can  only  ask  them  to  show  us  a 
main  outline.     This  has  been  done  in  many  publica- 
tions, among  which  I  have  studied,  with  as  much 
care  as  these  distracting  times  allow,  "  Self-Govern- 
ment  in  Industry/'  by  G.  D.  H.  Cole,  "  National 
Guilds,"  by  A.  R.  Orage  (so  described  on  the  back 
of  the  book,  but  the  title-page  says  that  it  is  by 


THE   CAPITALIST   THIEF  203 

S.  G.  Hobson,  edited  by  A.  R.  Orage),  and  "  The 
Meaning  of  National  Guilds,"  by  C.  E.  Bechhofer  and 
M.  B.  Reckitt. 

These  authorities  seem  to  agree  in  thinking  (i) 
that  the  capitalist  is  a  thief,  (2)  that  the  manual 
worker  is  a  wage  slave,  (3)  that  freedom  (in  the  sense 
of  being  able  to  work  as  he  likes)  is  every  man's 
rightful  birthright,  and  (4)  that  this  freedom  is  to 
be  achieved  through  the  establishment  of  National 
Guilds,  As  to  (i)  Messrs  Bechhofer  and  Reckitt 
speak  on  page  99  of  their  book  of  the  "  felony  of 
Capitalism  "  as  a  matter  that  need  not  be  argued 
about.  Mr  Cole  makes  the  same  assumption  by 
observing  on  page  235  of  the  work  already  men- 
tioned that  "to  do  good  work  for  a  capitalist 
employer  is  merely,  if  we  view  the  situation  ration- 
ally, to  help  a  thief  to  steal  more  successfully." 
Well,  this  view  of  capital  and  the  capitalist  may  be 
true.  Mr  Cole  is  a  highly  educated  and  gifted 
gentleman,  and  a  Fellow  of  Magdalen.  He  may 
have  expounded  and  proved  this  point  in  some  work 
that  I  have  not  been  fortunate  enough  to  read.  But 
as  the  abolition  of  the  capitalist  is  one  of  the  chief 
aims  put  forward  by  these  writers  it  seems  a  pity  that 
they  should  thus  first  assert  that  he  is  a  thief  to  be 
stamped  out,  instead  of  explaining  the  matter  to 
old-fashioned  folk  who  believe  that  capitalists  are, 
in  the  main,  the  people  (or  representatives  of  the 
people)  who  have  equipped  industry,  and  enormously 
multiplied  its  efficiency  and  output,  and  so  have 
enabled  the  greater  part  of  the  existing  population 
of  this  country  (and  most  others)  to  come  into  being. 


204  NATIONAL   GUILDS 

But  to  the  Guild  Socialists  the  identity  of  robbery 
with  capitalism  seems  to  be  so  self-evident  that  it 
needs  no  proof.  Next,  as  to  the  wage  system.  They 
seem  to  think  that  to  earn  a  wage  is  slavery  and 
degradation,  but  to  receive  pay  is  freedom.  With 
the  best  will  in  the  world  I  have  tried  to  see  where 
this  immense  difference  between  the  use  of  two  words, 
which  seem  to  me  to  mean  much  the  same  thing, 
conies  in  in  their  view,  but  I  have  not  succeeded. 
Perhaps  you  will  be  able  to  if  I  give  you  Mr  Cole's 
own  words. 

On  page  154  of  the  book  cited,  he  says  that  the 
wage  system  is  "  the  root  of  the  whole  tyranny  of 
capitalism,"  and  then  continues  : 

"  There  are  four  distinguishing  marks  of  the  wage 
system  upon  which  National  Guildsmen  are  accus- 
tomed to  fix  their  attention.  Let  me  set  them  out 
clearly  in  the  simplest  terms. 

"  i.  The  wage  system  abstracts  '  labour '  from 
the  labourer,  so  that  the  one  can  be  bought  and  sold 
apart  from  the  other. 

"2.  Consequently,  wages  are  paid  to  the  wage 
worker  only  when  it  is  profitable  to  the  capitalist  to 
employ  his  labour. 

"3.  The  wage  worker,  in  return  for  his  wage, 
surrenders  all  control  over  the  organisation  of 
production. 

"  4.  The  wage  worker,  in  return  for  his  wage, 
surrenders  all  claim  upon  the  product  of  his  labour. 

"  If  the  wage  system  is  to  be  abolished,  all  these 
four  marks  of  degraded  status  must  be  removed. 


THE  GUILD  [IDEAL  205 

National  Guilds,  then,  must  ^assure  to  the  worker, 
at  least,  the  following  things  :— 

"  i.  Recognition  and  payment  as  a  human  being, 
and  not  merely  as  a  mortal  tenement  of  so  much 
labour  power  for  which  an  efficient  demand 
exists. 

"2.  Consequently,  payment  in  employment  and 
in  unemployment,  in  sickness  and  in  health  alike. 

"  3.  Control  of  the  organisation  of  production  in 
co-operation  with  his  fellows. 

"  4.  A  claim  upon  the  product  of  his  work,  also 
exercised  in  co-operation  with  his  fellows/' 

Now,  looking  with  a  most  dispassionate  eye  and 
an  eager  desire  to  find  out  what  it  is  that  Labour  and 
its  spokesmen  are  grouping  after,  can  one  find  in 
these  "  marks  of  degraded  status  "  any  serious  evil, 
or  anything  that  is  capable  of  remedy  under  any 
conceivable  economic  system  ?  In  all  of  them  the 
wage-earner  is  on  exactly  the  same  footing  as  the 
salary-earner  or  the  professional  piece-worker.  The 
labour  of  the  manager  of  the  works  can  also  be 
abstracted  from  the  manager,  and  can  be  bought  and 
sold  apart  from  him.  One  would  have  thought  that 
this  fact  is  rather  in  favour  of  the  manager  and  of 
the  wage-earner — or  would  Mr  Cole  prefer  that  the 
latter  should  be  bought  and  sold  himself  ?  The 
salary-earner  and  the  professional  are  only  employed 
when  somebody  wants  them.  The  manager's  term 
of  employment  is  longer,  but  the  professional  piece- 
worker, such  as  I  am  when  I  write  this  article,  has 
usually  no  contracted  term,  and  is  only  paid  for  actual 


2o6  NATIONAL  GUILDS 

work  done.  I  also  have  no  control  over  the  organisa- 
tion of  the  production  of  Sperling's  Journal  or  any 
other  paper  for  which  I  do  piecework.  I  am  very 
glad  that  it  is  so,  for  organising  production  is  a  very 
difficult  and  complicated  and  risky  business,  and 
from  all  the  risks  of  it  the  wage-earner  is  saved. 
The  salary-earner  or  the  professional,  when  once 
his  product  is  turned  out  and  paid  for,  also  surrenders 
all  claim  upon  the  product.  What  else  could  any 
reasonable  wage-earner  or  professional  expect  or 
desire  ?  The  brickmaker  or  the  doctor  cannot, 
after  being  paid  for  making  bricks  or  mending  a 
broken  leg,  expect  still  to  have  the  bricks  or  the  leg 
for  his  very  own.  And  how  much  use  would  they 
be  to  him  if  he  could  ?  Unless  he  were  to  be 
allowed  to  sell  them  again  to  somebody  else,  which, 
after  being  once  paid  for  them,  would  merely  be 
absurd. 

But  when  we  come  to  the  remedies  that  Mr  Cole 
suggests  for  these  "  marks  of  degraded  status,"  we 
find  in  the  forefront  of  them  that  the  worker  must  be 
secured  "  payment  as  a  human  being,  and  not  merely 
as  a  mortal  tenement  of  so  much  labour  power  for 
which  an  efficient  demand  exists."  This,  especially 
to  an  incurably  lazy  person  like  myself,  is  an  ex- 
tremely attractive  programme.  To  be  paid,  and 
paid  well,  merely  in  return  for  having  "  taken  the 
trouble  to  be  born,"  is  an  ideal  towards  which  my 
happiest  dreams  have  ever  struggled  in  vain.  But 
would  it  work  as  a  practical  scheme  ?  Speaking  for 
myself,  I  can  guarantee  that  under  such  circum- 
stances I  should  potter  about  with  many  activities 


AN   UNSOCIAL   IDEAL  207 

that  would  amuse  my  delicious  leisure,  but  I  doubt 
whether  any  of  them  would  be  regarded  by  society 
as  a  fit  return  for  the  pleasant  livelihood  that  it  gave 
me.  And  human  society  can  only  be  supplied  with 
the  things  that  it  needs  if  its  members  turn  out,  not 
what  it  amuses  them  to  make  or  produce,  but  what 
other  people  want.  And  it  is  here  that  the  National 
Guildsmen's  idea  of  freedom  seems,  in  my  humble 
judgment,  to  be  entirely  unsocial.  As  things  are, 
nobody  can  make  money  unless  he  produces  what 
somebody  wants  and  will  pay  for.  Even  the 
capitalist,  if  he  puts  his  capital  into  producing  an 
article  for  which  there  is  no  demand,  will  get  no 
return  on  it.  In  other  words,  we  can  only  earn 
economic  freedom  by  doing  something  that  our 
fellows  want  us  to  do,  and  so  co-operating  in  the 
work  of  supplying  man's  need.  (That  many  of  man's 
needs  are  stupid  and  vulgar  is  most  true,  but  the 
only  way  to  cure  that  is  to  teach  him  to  want  some- 
thing better.)  The  Guildsmen  seem  to  think  that 
this  necessity  to  make  or  do  something  that  is  wanted 
implies  slavery,  and  ought  to  be  abolished.  They  are 
fond  of  quoting  Rousseau's  remark  that  "  man  is 
born  free  and  is  everywhere  in  chains."  But  is  man 
born  free  to  work  as  and  on  what  he  likes  ?  In  a 
state  of  Nature  man  is  born — in  most  climates — 
under  the  sternest  necessity  to  work  hard  to  catch  or 
grow  his  food,  to  make  himself  clothes  and  build 
himself  shelter.  And  if  he  ignores  this  necessity  the 
penalty  is  death.  The  notion  that  man  is  born  with 
a  "  right  to  live  "  is  totally  belied  by  the  facts  of 
natural  existence.  It  is  encouraged  by  humanitarian 


208  NATIONAL   GUILDS 

sentiment  which  rightly  makes  society  responsible 
for  the  subsistence  of  all  those  born  under  its 
wing ;  but  it  is  not  part  of  the  scheme  of  the 
universe. 

Such  are  a  few  of  the  weaknesses  involved  by  the 
theoretical  basis  on  which  Guild  Socialism  is  built. 
When  we  come  to  its  practical  application  we  find 
the  creed  still  more  unsatisfactory.  Even  if  we 
grant — an  enormous  and  quite  unjustified  assump- 
tion— that  the  Guildsman,  if  he  is  to  be  paid  merely 
for  being  alive,  will  work  hard  enough  to  pay  the 
community  for  paying  him,  we  have  then  to  ask  how 
and  whether  he  will  achieve  greater  freedom  under 
the  Guilds  than  he  has  now.  Now,  freedom  is  only 
to  be  got  by  work  of  a  kind  that  somebody  wants, 
and  wants  enough  to  pay  for  it.  And  so  the  con- 
sumer ultimately  decides  what  work  shall  be  done. 
The  Guildsman  says  that  the  producer  ought  to 
decide  what  he  shall  produce  and  what  is  to  be  done 
with  it  when  he  has  produced  it.  "  Under  Guild 
Socialism/'  says  Mr  Cole,*  "  as  under  Syndicalism, 
the  State  stands  apart  from  production,  and  the 
worker  is  placed  in  control/'  Very  well,  but  what 
one  wants  to  know  is  what  will  happen  if  the  Guilds 
choose  to  produce  things  that  nobody  wants.  Will 
they  and  their  members  be  paid  all  the  same  ? 
Presumably,  since  they  are  to  be  paid  "  as  human 
beings  "  and  not  because  there  is  a  demand  for  their 
work.  But  if  so,  what  will  happen  to  the  Guildsman 
as  consumer  ?  There  will  be  no  freedom  about  his 
choice  of  things  that  he  would  like  to  enjoy.  And 
*  "  The  Meaning  of  Industrial  Freedom,"  page  39. 


MODIFIED   FREEDOM  209 

what  about  admission  to  membership  of  a  Guild,  the 
price  at  which  the  Guilds  will  exchange  products  one 
with  another,  and  the  provision  of  capital  ?  The 
nearest  approach  to  an  answer  to  these  questions 
is  given  by  Messrs  Bechhofer  and  Reckitt  in 
Chapter  VIII.  of  the  "  Meaning  of  National  Guilds/' 
This  chapter  describes  "  National  Guilds  in  Being." 
It  tells  us  that  "  each  man  will  be  free  to  choose  his 
Guild,"  which  sounds  very  pleasant,  but  is  com- 
pletely spoilt  by  the  end  of  the  sentence,  which  says 
"  and  actual  entrance  will  depend  on  the  demand  for 
labour."  It  sounds  just  like  a  capitalistic  factory. 
And  then — "  Labour  in  dirty  industries,  sewaging, 
etc. — will  probably  be  in  the  main  of  a  temporary 
character,  and  will  be  undertaken  by  those  who  are 
for  the  time  unable  to  obtain  an  entry  elsewhere." 
Most  sensible,  but  where  is  the  freedom  ?  The 
Guildsman  will  not  be  able  to  do  the  work  that  he 
wants  to  do  unless  there  is  a  demand  for  that  kind  of 
labour,  and  in  the  meantime,  just  like  the  unem- 
ployed in  the  days  of  darkness,  he  will  be  set  to 
cleaning  the  streets  and  flushing  the  drains.  Messrs 
Bechhofer  and  Reckitt  are,  in  fact,  so  sensible  and 
practical  that  they  abandon  altogether  the  freedom 
of  the  producer  to  produce  what  he  likes.  ' '  Indeed, 
they  write,  "  a  query  often  brought  to  confound 
National  Guildsmen  is  this  :  What  would  happen  to  a 
National  Guild  that  began  to  work  wholly  according 
to  its  own  pleasure  without  regard  to  the  other  Guilds 
and  the  rest  of  the  community  ?  We  may  reply, 
first,  that  this  spirit  would  be  as  unnatural  among  the 
Guilds  as  it  is  natural  nowadays  with  the  present 


210  NATIONAL  GUILDS 

anti-communal,  capitalist  system  of  industry " 
(but  under  the  present  system  any  one  who  worked 
without  regard  to  the  rest  of  the  community  would 
very  soon  be  in  the  hands  of  a  Receiver) ;  "  secondly, 
if  it  did  arise  in  any  Guild,  this  contempt  for  the  rest 
of  the  community  would  be  met  by  the  concerted 
action  of  the  other  Guilds.  The  dependence  of  any 
individual  Guild  upon  the  others  would  be  necessarily 
so  great  that  a  recalcitrant  Guild  would  find  itself  at 
once  in  a  most  difficult  position,  and  a  Guild  that 
pressed  forward  demands  that  were  generally  felt  by 
the  rest  of  the  community  to  be  impossible  or 
unreasonable  would  soon  be  brought  back  into  line 
again/' 

Of  course ;  but  if  so,  where  is  the  Guildsman's 
alleged  freedom  ?  Every  Guild  and  every  Guildsman 
would  have  to  adapt  himself  to  the  wants  of  the 
community,  just  as  all  of  us  who  work  for  our  living 
have  to  do  now.  He  would  be  no  more  free  than  I 
am,  and  I  am  no  more  free  than  the  person  who  is 
sometimes  described  as  a  "  wage  slave."  The 
Guildsman  might  be  happier  in  the  feeling  that  he 
worked  for  a  Guild  rather  than  a  capitalist  employer, 
but  this  is  by  no  means  certain.  The  writers  just 
quoted  show  with  much  frankness  and  good  sense 
that  there  would  be  plenty  of  opening  for  friction, 
suspicion,  discontent  and  strikes.  "  A  Guild/'  they 
say,  "  that  thought  itself  ill-used  by  its  fellows  would 
be  able  to  signify  its  displeasure  by  the  threat  of  a 
strike/'  The  officials  of  the  Guild  are  to  be  chosen 
by  the  "  men  best  qualified  to  judge  "  of  their  ability, 
whoever  they  may  be,  and  every  such  choice  would  be 


VIGILANCE   COMMITTEES  211 

ratified  by  the  workers  who  are  to  be  affected  by  it. 
'  The  Guild  would  build  up  in  this  way  a  pyramid  of 
officers,  each  chosen  by  the  grade  immediately  below 
that  which  he  is  to  occupy. ' '  Did  not  the  Bolsheviks 
try  something  like  this  system,  with  results  that  were 
not  conducive  to  efficient  production  ?  And  to  meet 
the  danger  that  the  officials  as  a  whole  might  combine 
"  in  a  huge  conspiracy  against  the  rank  and  file/' 
Messrs  Bechhofer  and  Reckitt  can  only  suggest 
vigilance  committees  within  the  Guilds.  In  a  word, 
Guild  Socialism  seems  to  be  a  system  that  might 
possibly  be  worked  by  a  set  of  ideally  perfect  beings  ; 
but  as  folk  are  in  this  workaday  world  one  can  only 
doubt  whether  it  would  be  conducive  either  to 
freedom,  efficiency  or  a  pleasant  life  for  those  who 
lived  under  it. 


XV 

POST-WAR  FINANCE 

November,  1918 

Taxation  after  the  War — Mr.  Hoare's  Scheme  described  and 
analysed — The  Position  of  the  Rentier — Estimates  of  the 
Post- War  Debt—The  Compulsory  Loan  Proposal— What 
Advantages  has  it  over  a  Levy  on  Capital  ? — The  Argument 
from  Social  Justice — Questions  still  to  be  answered — The 
Choice  between  a  Levy  and  Stiff  Taxation — Are  we  still  a 
Creditor  Nation  ?—  Our  Debt  not  a  Hopeless  Problem — 
Suggestions  for  solving  it. 

UNDER  this  heading  two  very  interesting  articles 
were  contributed  to  the  October  issue  of  Sperling's 
Journal  by  Mr  Alfred  Hoare  and  an  "  Ex-M.P.," 
and  the  subject  is  clearly  one  to  which,  now  that  the 
end  of  the  war  has  been  brought  appreciably  nearer 
by  the  feats  of  the  Allied  armies,  too  much  thought 
and  discussion  can  hardly  be  given.  How  are  we 
going  to  face  the  problem  that  has  been  built  up  for  us 
by  the  bad  finance  of  the  war,  the  low  proportion  of 
its  cost  that  has  been  paid  for  out  of  taxation,  and  tl\e 
consequent  huge  debt  with  which — it  is  already  over 
£7000  millions  gross — the  State  will  be  saddled  ? 
Mr.  Hoare  answered  the  question  by  proposing  a 
scheme  of  taxation  of  what  he  called  Rente,  by 
which  he  meant  all  forms  of  "  unearned  income  " 
— "  rentals  from  freehold  and  leasehold  property, 


THE   RENTIER  213 

interest  upon  loans  whether  public  or  private,  and 
dividends  on  joint  stock  companies  or  sleeping 
partnerships."  He  added  that  in  his  opinion  earned 
income  above  a  certain  figure  might  reasonably  be 
added  to  this  category  on  the  ground  that  it  has, 
in  some  instances,  very  much  the  same  character- 
istics as  unearned  ;  the  income  of  a  "  successful  pro- 
fessional man  or  clown  or  jockey  or  opera  star" 
being  due  to  peculiar  qualities  ;  "  and  it  would  be  no 
great  hardship  if  earned  income  above,  say,  a 
thousand  a  year  for  a  married  couple,  with  an 
additional  three  hundred  for  every  child  under 
twenty-five  years  of  age  were  regarded  as  unearned, 
and  taxed  accordingly."  Income  was  thus  the  basis 
of  Mr  Hoare's  scheme.  Rente  he  regards  as  an 
agency  regulating  distribution,  and  requiring  to  be 
constantly  checked.  "  It  is,"  he  says,  "  an 
elementary  principle  of  social  health  and  economic 
prosperity  that  the  share  of  the  national  wealth 
enjoyed  by  the  Rentier,  by  the  owner,  that  is,  of 
unearned  income,  should  not  be  excessive."  Most 
people  who  can  follow  his  admirable  example  and 
take  a  detached  and  unbiassed  view  of  questions 
which  affect  their  pocket  so  closely,  will  agree  with 
him  in  this  opinion.  The  Rentier  lives  on  the 
proceeds  of  work  done  in  the  past  by  him  or  by  some 
other  person ;  and  it  is  not  good  for  our  economic 
health  that  he  should  grow  too  fat  at  the  expense  of 
those  who  are  working  now,  lest  the  latter  be 
discouraged  and  work  with  less  spirit. 

At  the  same  time  we  have  to  remember  that  the 
work  done  in  the  past  by  the  Rentier  or  those  whom 

p 


214  POST-WAR   FINANCE 

he  represents,  has  given  us  the  plant  and  equipment 
(in  the  widest  sense  of  the  phrase)  with  which  we  are 
now  working.  If,  therefore,  we  penalise  the  Rentier 
too  severely  we  shall  discourage  his  future  creation  j 
the  present  race  of  earners,  if  they  see  that  those  who 
are  living  on  past  savings  are  shorn  too  close  will  be 
deterred  from  saving,  will  put  their  surplus  earnings 
into  extravagant  spending  instead  of  into  plant  and 
equipment,  and  the  economic  future  of  the  nation, 
and  of  the  world,  will  be  pro  tanto  less  hopeful.  If 
once  our  fiscal  system  is  going  to  propagate  the  view 
— already  so  rampant  among  the  happy-go-lucky 
citizens  of  this  unthrifty  people — that  the  worst 
thing  to  do  with  money  is  to  save  it  there  will  be  bad 
times  ahead  for  our  industry  and  commerce,  which 
can  only  get  the  capital  that  it  needs  if  somebody 
saves  it.  Mr  Hoare's  elaborate  calculations  led  him 
to  conclusions  involving  a  tax  of  us.  6d.  in  the  pound 
on  unearned  income.  This  figure  is,  I  hope,  need- 
lessly high.  To  arrive  at  it  he  assumed  that  peace 
might  be  concluded  towards  the  end  of  1919,  and 
that  when  peace  conditions  are  fully  re-established— 
which  will  take,  he  thinks,  three  years,  the  National 
Debt  will  amount  to  £10,000  millions,  involving 
annual  interest  of  £500  millions,  which,  added  to  the 
total  Rente  of  the  country  in  1913  (which  he  made 
out  to  be  £520  millions),  will  make  a  total  Rente  in 
1923  of  £1020  millions.  His  view  is  that  the  burden 
of  the  National  Debt  should  be  thrown  by  means  of 
the  income  tax  upon  the  national  Rente,  not  taxing 
it  out  of  existence,  but  by  such  a  scale  of  taxation 
as  would  reduce  the  net  Rente  of  the  country  to 


THE   AFTER-WAR   DEBT  215 

approximately  the  level  at  which  it  stood  before  the 
war. 

There  is  good  reason  to  hope  that  Mr  Hoare' s 
figures  will  not  be  reached.  He  took  £10,000  millions 
merely  as  a  round  sum.  Mr  Bonar  Law,  it  will  be 
remembered,  worked  out  our  net  debt  on  March  3ist 
next  at  £6856  millions,  taking  credit  for  half  the 
estimated  amount  of  loans  to  Allies  as  a  good  asset. 
If  we  prefer  as  sounder  bookkeeping  to  write  off  the 
whole  of  our  loans  to  Allies  for  the  time  being  and  to 
apply  anything  that  we  may  hereafter  receive  on 
that  account  to  Sinking  Fund,  the  debt,  on  the 
Chancellor's  figures,  will  amount  on  March  3ist  (if 
the  war  goes  on  till  that  date)  to  £7672  millions. 
Even  if  the  war  went  on  for  six  months  more  it  ought 
not  to  bring  the  debt  up  to  more  than  £9000  millions 
at  the  outside.  It  is  quite  true,  as  Mr  Hoare  says, 
that  the  return  to  peace  conditions  will  be  a  gradual 
process,  and  that  expenditure  will  not  come  back  to  a 
peace  basis  all  at  once.  Demobilisation  and  other 
matters  which  were  left,  by  our  cheery  Chancellor, 
out  of  the  airy  after-war  balance-sheet  that  he  so 
light-heartedly  constructed,  may  cost  £1000  millions 
or  more  before  we  have  done  with  them.  But  against 
them  we  can  set  a  string  of  recoverable  assets  which, 
in  the  Chancellor's  hands,  footed  up  a  total  of 
£1172  millions— balances  in  agents'  hands,  due  debts 
(apart  from  loans  to  Allies),  land,  securities,  ships, 
buildings,  stores  in  Munitions  Department,  arrears  of 
taxation,  and  so  on.  With  his  us.  6d.  in  the  pound 
on  unearned  and  6s.  in  the  pound  on  earned  incomes, 
Mr  Hoare  expects  a  revenue  of  £620  millions,  "  or 


216  POST-WAR   FINANCE 

enough  to  provide  for  the  interest  of  the  debt  with  a 
i  per  cent.  Sinking  Fund,  and  leave  £20  millions 
towards  the  Supply  Services."  But  Mr  Bonar  Law 
anticipated  a  total  peace  Budget  (if  the  war  ended 
by  March  3ist  next)  of  £650  millions.  This  was 
probably  too  low,  but  we  may  at  least  hope  that 
Mr  Hoare  has  gone  rather  further  than  was  necessary 
to  be  on  the  safe  side. 

In  the  other  article  on  the  subject  of  post-war  debt 
contributed  to  the  last  number  of  this  Journal,  an 
"  Ex-M.P."  plumped  for  a  somewhat  novel  variety  of 
the  Levy  on  Capital,  in  the  shape  of  a  Compulsory 
Loan,  bearing  no  interest  and  repayable  in  100  years. 
Each  individual  citizen  to  be  made  to  subscribe  to 
the  extent  of  20  per  cent,  of  his  possessions.  Ten  per 
cent,  of  the  amount  due  to  be  paid  on  application, 
10  per  cent,  six  months  after  allotment,  and  80  per 
cent,  on  January  ist  of  the  following  year.  When 
desired,  the  Government  to  advance  at  5  per  cent, 
the  money  necessary  for  the  payment  subsequent  to 
allotment,  full  repayment  of  such  advances  to  be 
made  within  eight  years.  A  Sinking  Fund  to  be 
established  to  redeem  the  loan  at  maturity.  But  is 
there  any  real  advantage  in  this  scheme  over  the 
Levy  on  Capital,  from  which  it  only  differs  by  the 
receipt  by  the  payer  of  a  promise  to  repay  in  100 
years'  time  ?  The  approximate  value  of  £1000 
nominal  of  the  Compulsory  Loan  stock  would  be, 
according  to  "  Ex-M.P.'s  "  calculation,  in  the  year 
of  issue  £7  I2s.,  money  being  worth  5  per  cent,  and 
assuming  that  rate  to  be  current  during  the  remainder 
of  the  term.  The  claim  that  there  is  no  confiscation, 


"A  PERFECTLY  GOOD  SECURITY"    217 

because  "  a  perfectly  good  security  is  given  for  the 
money  received/'  would  seem  rather  futile  to  those 
who  paid  £1000  and  received  a  security,  the  present 
value  of  which  might  be  below  £10.  They  might 
very  likely  think  that  outright  confiscation  (since 
confiscation  originally  means  nothing  but  "  putting 
into  the  Treasury  ")  is  really  a  simpler  way  of  dealing 
with  the  problem.  "  Ex-M.P.,"  however,  estimates 
that  the  immediate  redemption  of  £2800  millions  of 
debt  (which  he,  rather  modestly,  expects  to  be  the 
result  of  his  20  per  cent,  levy)  would  enable  the 
balance  of  the  War  Debt  to  be  converted  into  3!  per 
cent,  stock.  This  may  be  true,  but  if  so  it  is  equally 
true  if  a  similar  or  larger  amount  of  debt  is  cancelled 
by  means  of  an  outright  Levy  on  Capital. 

The  merits  and  demerits  of  a  Levy  on  Capital  have 
already  been  dealt  with  in  the  pages  of  this  Journal. 
"  Ex-M.P./'  however,  brought  forward  a  slightly 
novel  form  of  argument  in  its  favour.  He  pointed 
out  that  the  money  constituting  the  great  increase 
in  debt  that  has  taken  place  during  the  war  will  have 
been,  in  the  main,  contributed  by  people  who  have 
worked  at  home  under  the  protection  of  the  Army 
and  Navy,  while  the  soldiers  and  sailors  have  been 
prevented  by  the  duty  which  sent  them  out  to  risk 
their  lives  from  subscribing  a  proportionate  share  to 
the  National  Debt.  Hence  "  a  class  that  deserves 
most  of  the  State  will  find  itself  indebted  to  a  class 
which — if  it  does  not  deserve  least  of  the  State — has, 
at  any  rate,  turned  a  national  emergency  to  personal 
profit."  This  is  a  strong  argument,  which  has  been 
used  frequently  in  the  course  of  the  war  in  the  pages 


218  POST-WAR   FINANCE 

of  the  Economist,  against  borrowing  for  war  purposes 
to  the  large  extent  to  which  our  timid  rulers  have 
adopted  the  policy.  '  To  be  really  just,"  the  writer 
continued,  "  the  process  of  taxation  .  .  .  must  be 
applied  with  greatest  force  to  those  who  have 
accumulated  their  money  since  the  outbreak  of  war, 
and  only  to  a  less  degree  to  those  whose  fortunes 
have  not  been  built  upon  their  country's  necessity. 
The  difficulty  of  separating  these  two  classes  of 
wealth  is  great,  and  must,  in  the  writer's  opinion,  be 
effected  by  separate  legislation — legislation  which 
might  justly  be  based  upon  the  increase  in  post-igis 
incomes,  a  record  of  which  should  now  be  in  prepara- 
tion at  Somerset  House. ' '  Everyone  will  agree  that 
everything  possible  should  be  done  to  take  the  burden 
of  the  war  debt  off  the  shoulders  of  those  who  have 
fought  for  us ;  but  it  is  equally  clear  that  now  that 
the  mischief  of  this  huge  debt  has  been  done,  it  will 
be  exceedingly  difficult  to  repair  it  by  any  ingenuities 
of  this  kind.  For  instance,  if  the  kind  of  taxation — 
in  the  shape  of  a  Compulsory  Loan — proposed  by 
"  Ex-M.P."  wrere  enforced,  how  can  we  be  sure  that 
it  would  not  take  a  large  slice  off  capital,  the  next 
heir  to  which  is  a  soldier  or  a  sailor  ?  Bad  finance 
is  so  much  easier  to  perpetrate  than  to  remedy  that 
one  is  almost  certain  to  come  across  such  objections 
as  this  to  any  scheme  for  making  the  war  profiteers 
"  cough  up  "  some  of  their  gains. 

Moreover,  we  have  to  remember  that  by  no 
means  the  whole  of  the  war  debt  represents  ihe  gains 
of  those  who  "  have  turned  a  national  emergency  to 
personal  profit."  Some  people  whose  incomes  have 


THE  LEVY   ON   CAPITAL  219 

been  actually  decreased  by  the  war,  especially  when 
currency  depreciation  is  taken  into  account,  have,  in 
response  to  the  appeals  of  the  War  Savings  Com- 
mittee, saved  more  than  they  ever  saved  before  by 
patriotically  stinting  themselves.  And  even  the 
savers  who  have  saved  out  of  war  profits  were  so  far 
more  patriotic  than  the  war  profiteers  who  did  not 
save  but  squandered.  In  all  the  discussion  con- 
cerning the  Levy  on  Capital  I  have  not  seen  any 
answer  (even  in  Mr  Pethick  Lawrence's  very  per- 
suasive little  book  in  its  favour)  to  the  three  great 
objections  to  it  (i)  that  it  lets  off  the  squanderer  and 
penalises  the  saver ;  (2)  that  the  difficulty,  trouble 
and  expense  involved  by  the  necessary  valuation, 
and  the  iniquities  and  frauds  that  are  almost  certain 
to  arise  out  of  it,  will  be  enormous  ;  and  (3)  that  its 
economic  effect  may  be  very  serious  in  discouraging 
accumulation.  "  Why  should  any  one  save,"  the 
unthrifty  soul  will  most  naturally  ask,  "  if  his  savings 
are  liable  to  have  a  slice  cut  out  of  them  by  a  levy 
at  any  time  ?  "  The  advocates  of  the  Levy,  and 
"  Ex-M.P."  in  his  advocacy  of  a  Compulsory  Loan 
for  repayment  of  debt,  assume  that  it  can  be  done 
once  and  for  all  and  never  again.  "  Take  one-fifth  of 
a  man's  savings  away  as  an  emergency  measure  not 
to  be  repeated,  and  he  will  at  once  endeavour  to  save 
it  back  again."  But  how  will  you  persuade  him 
that  it  is  an  emergency  measure  not  to  be  repeated  ? 
How  can  you  be  sure  that  it  is  so  ?  I  have  heard  a 
very  distinguished  Socialist,  discussing  in  private 
the  beauties  of  the  Levy  on  Capital,  point  out  that 
it  is  the  sort  of  thing  which,  when  once  the  ice  has 


220  POST-WAR   FINANCE 

been  broken,  can  be  done  again  so  easily.  From  the 
Socialist  point  of  view  the  Levy  on  Capital  is,  of 
course,  a  simple  means  of  getting,  by  repetitions  of 
it  at  regular  intervals,  all  the  means  of  production 
into  the  hands  of  the  State;  but  would  the  State 
make  a  good  use  of  them  ? 

Another  assumption  about  the  Levy  on  Capital 
that  seems  to  me  to  be  the  merest  will  o'  the  wisp  is 
the  delusion  that  the  whole  saving  that  it  would 
entail  by  reducing  the  debt  charge  would  necessarily 
and  certainly  go  to  the  relief  of  income  tax.  On  this 
assumption  Mr  Pethick  Lawrence  bases  his  most 
persuasive  appeal  to  the  smaller  income-tax  payer,  by 
showing  that  he  would  be  better  off  after  a  Levy  on 
Capital  than  before  it,  thanks  to  the  reduction  in 
income  tax,  which  is  assumed  as  axiomatically 
arising  in  its  train.  But  is  this  certain  or  even 
likely  ?  Is  it  not  much  more  probable  that  our 
Government,  finding  its  post-war  Budget  greatly 
lightened  by  a  Levy  on  Capital  or  a  Compulsory  Loan 
to  redeem  debt,  will  think  itself  free  to  indulge  in 
extravagance,  maintaining  a  considerable  part  of  the 
war  income  tax  and  wasting  it  on  rash  experiments  ? 
All  these  weaknesses,  which  appear  to  be  inherent 
alike  in  the  Levy  on  Capital  or  in  the  scheme  which 
gilds  the  pill  by  calling  it  a  Compulsory  Loan,  seem 
to  be  ignored  or  neglected  (perhaps  because  they  are 
unanswerable)  by  their  advocates.  On  the  other 
hand,  there  are  certain  psychological  arguments  on 
the  other  side.  If  the  well-to-do,  who  would  have 
to  pay  the  Levy  or  subscribe  to  the  Compulsory 
Loan,  would  prefer  that  system  to  a  high  income  tax, 


THE  CAPITAL   LEVY  221 

there  is  no  more  to  be  said.  A  tax  that  is  popular 
with  the  payer,  as  compared  with  other  modes  of 
shearing  his  fleece,  needs  no  further  recommendation. 
But,  in  view  of  the  probability  of  the  experiment, 
once  tried,  being  shortly  and  frequently  repeated,  I 
very  much  doubt  whether  this  is  so  ;  as  far  as  I  have 
been  able  by  personal  inquiry  to  test  opinion  on  the 
point  I  have  found  it  almost  unanimously  adverse 
among  those  whom  the  Levy  would  most  seriously 
affect.  If,  as  is  much  more  likely,  the  imposition  of 
a  Levy  created  better  feeling  among  the  working 
classes  and  the  returning  soldiers  and  tended  to  more 
harmonious  co-operation  in  after-war  tasks  of 
reconstruction,  it  might  be  worth  while  to  face  its 
evils  and  its  dangers.  But  here  again  it  is  quite 
probable  that  if  the  burden  of  war  debt  were  clearly 
and  palpably  put  on  the  shoulders  best  able  to  bear 
it,  that  is,  on  those  who  are  lifted  by  the  gifts  of 
fortune — either  in  inherited  money  or  unusual  brain- 
power or  faculties — by  an  equitably  graded  income 
tax,  the  effect  might  be  just  as  good  on  the  minds  of 
those  who  suspect  that  the  rich  have  battened 
throughout  the  war  on  exploitation  of  the  poor. 

This  much  at  least  seems  to  be  agreed  by  most 
reasonable  people  about  the  debt  charge— that  it  will 
have  to  be  raised,  either  by  a  Levy  on  Capital  or  by 
income  tax  or  some  other  form  of  direct  taxation, 
from  those  who  are  blessed  with  a  margin.  We  are 
not  likely  to  repeat  our  ancestors'  mistake,  after  the 
Napoleonic  War,  of  throwing  the  whole  burden  on 
to  the  general  consumer  by  indirect  taxation  of 
necessaries  and  of  articles  of  general  consumption. 


222  POST-WAR   FINANCE 

Even  Tariff  "Reformers"  say  little  about  the 
revenue  that  their  fiscal  schemes  would  bring  in. 
And  with  good  reason.  For  in  so  far  as  they  secured 
Protection  they  would  bring  in  no  revenue ;  we 
cannot  at  once  keep  out  foreign  goods  and  tax  them  ; 
and  any  revenue  that  they  brought  in  would  be  most 
expensively  raised,  because  a  large  part  of  the  extra 
price  paid  by  the  consumer  would  go  not  to  the  State 
but  into  the  pockets  of  the  home  producer.  Nor  is 
it  likely  that  any  of  the  many  schemes — of  which 
Mr  Stilwell's  "  Great  Plan,  How  to  Pay  for  the  War," 
is  a  particularly  bold  example — for  paying  off  debt 
by  a  huge  issue  of  inconvertible  currency,  will  achieve 
any  practical  result.  Not  only  would  they  defraud 
the  debt-holder  by  paying  him  off  in  currency 
enormously  depreciated  by  the  multiplication  of  it 
that  would  be  involved ;  but  they  would  also,  by 
that  depreciation,  throw  the  burden  of  the  debt  on 
the  shoulders  of  the  general  consumer  through  a 
further  disastrous  rise  in  prices,  and  so  would  accen- 
tuate the  bitterness  and  discontent  already  rife 
owing  to  the  war-time  dearness  and  all  the  suspicions 
of  profiteering  and  exploitation  that  it  has  engen- 
dered. 

After  all,  this  problem  of  the  war  debt,  in  so  far 
as  it  is  held  at  home,  is  not  one  that  ought  to  terrify 
us  if  we  look  at  it  steadily.  People  talk  and  write  as 
if  when  the  war  is  over  the  business  of  paying  for  it 
will  begin.  That  is  not  really  so.  The  war  has  been 
paid  for  as  it  went  on,  and,  except  in  so  far  as  it  has 
been  financed  by  borrowing  abroad,  it  has  been  paid 
for  by  us  as  a  nation.  Whatever  we  have  used  for 


THE   WAR   DEBT  223 

the  war  we  have  paid  for  as  it  went  on,  partly  with 
the  help  of  loans  from  America  and  from  other 
countries — Argentina,  Holland,  Switzerland,  etc. — 
that  have  lent  us  money.  These  loans  amount,  as 
far  as  they  can  be  traced  from  the  official  figures,  to 
about  £1300  millions.  Against  them  we  can  set  our 
loans  to  our  Dominions,  over  ^200  millions  (a 
perfectly  good  asset),  and  our  loans  to  our  Allies, 
perhaps  ^1500  millions,  which  the  Chancellor  pro- 
poses to  write  down  by  50  per  cent.,  and  might 
perhaps  treat  still  more  drastically.  To  meet  this 
foreign  debt  we  shall  have  to  turn  out  so  much  stuff — 
goods  and  services  of  all  kinds — for  sale  abroad  to 
meet  the  interest  and  repayment.  We  have  further 
impoverished  ourselves  by  selling  our  foreign 
securities  abroad.  No  figure  has  been  published 
giving  any  clue  to  the  amount  of  these  sales,  and  we 
may  perhaps  guess  them  at  £1000  millions.  If  the 
pre-war  estimates  of  our  overseas  investments  at 
£4000  millions  were  anywhere  near  the  mark,  it  thus 
appears  that  we  shall  end  the  war  still  a  great  creditor 
nation. 

In  so  far  as  the  debt  was  raised  at  home,  the  war 
was  paid  for  by  those  who  bought  the  securities 
offered,  and  we  have  now  to  pay  them  interest  and 
set  about  repaying  them  the  capital.  This  process 
will  not  diminish  the  national  wealth,  but  will 
only  affect  its  distribution.  It  will  not  diminish  the 
amount  of  available  capital,  but  may  even  rather 
increase  it  by  gathering  into  the  hands  of  the  debt- 
holders — who  are  ex-hypothesi  folk  with  an  inclina- 
tion for  saving — money  that  might,  if  left  in  the 


224  POST-WAR   FINANCE 

hands  of  those  from  whom  it  is  collected,  have  been 
squandered.  The  payment  of  the  debt  charge 
merely  means  that  those  who  came  f  orward  with  their 
money  when  they  were  asked  to  subscribe  to  war 
loans,  have,  according  to  the  extent  of  the  effort 
that  they  then  made,  a  set-off  against  the  subsequent 
taxation  involved  by  the  war  debt.  It  would  have 
been  a  much  simpler  and  more  businesslike  pro- 
ceeding to  have  taken,  instead  of  borrowing,  a  much 
larger  proportion  of  the  war's  cost  during  the  war ; 
but  it  is  too  late  now  to  rub  in  this  platitude  which  is 
now  pretty  generally  admitted.  Mr  Hoare  showed 
in  last  month's  Journal  that  the  creation  of  the  War 
Debt  has  caused  a  huge  addition  to  what  he  has 
called  Rente — the  gross  income  of  the  propertied 
classes ;  and  there  is  much  logic  in  his  contention 
that  this  income  is  the  source  from  which  the  debt 
charge  should  be  met.  At  the  same  time  both 
justice  and  economic  expediency  seem  to  demand 
that  his  wider  interpretation  of  Rente,  to  make  it 
include  the  earnings  of  those  whose  special  qualifica- 
tions (or,  we  may  add,  special  luck)  put  them  in  a 
position  to  earn  more  easily  than  the  struggling 
majority,  should  be  applied  to  taxation  involved  by 
the  debt  charge. 

How,  then,  shall  we  deal  with  the  debt  ?  In  the 
first  place  we  want  a  good  Sinking  Fund — i  per  cent, 
at  least — and  all  realisations  of  assets  in  the  shape  of 
loans  repaid,  ships,  etc.,  sold,  should  be  used  for 
reduction  of  our  foreign  debt.  For  the  home  charge 
we  want  a  special  form  of  income  tax  that  will  fall  as 
lightly  and  indirectly  as  possible  on  industry ;  that 


A   DEBT-CHARGE  SUPERTAX          225 

is,  that  it  should  be  imposed  on  the  individual  tax- 
payer direct.  So  that  what  we  want  is  an  extended, 
reformed  and  better  graduated  form  of  the  super-tax 
brought  down  so  low  that  every  one  who  is  not 
merely  rich  but  comfortable  should  pay  his  share. 
For  example,  any  single  man  or  woman  with  any 
excess  over  £500  a  year  of  unearned  income,  or  over 
£800  a  year  of  earned  income  might  well  pay  super- 
tax on  that  excess.  The  exemption  limit  might 
well  be  raised  by  50  per  cent,  for  married  couples  (if 
their  joint  incomes  are  still  to  be  counted  as  one), 
and  by  ^100  a  year  for  each  child  between  the  age  of 
five  and  twenty-five.  But  all  these  figures  are  mere 
suggestions,  and  the  details  of  the  scheme  would  have 
to  be  worked  out  by  Inland  Revenue  officials,  whose 
experience  and  knowledge  of  the  practical  working 
of  such  matters  qualifies  them  for  the  task.  The 
broad  principle  is  a  special  tax  for  the  debt  charge 
to  be  raised  direct  from  individual  incomes  with 
skilful  differentiation,  according  to  the  circumstances 
of  the  taxpayer,  in  the  matter  of  the  number  of  his 
dependants,  and  also  according  to  the  source  of  the 
income,  whether  it  is  being  earned  by  exertions  which 
illness  might  terminate  or  received  from  invested 
funds,  and  therefore  beyond  the  reach  of  the  "  slings 
and  arrows  of  outrageous  fortune."  That  portion  of 
the  tax  that  is  required  for  Sinking  Fund  might  be 
made  payable,  at  the  option  of  the  taxpayer,  in 
Government  securities  at  prices  giving  some  advan- 
tage to  the  holder.  This  form  of  special  debt-charge 
supertax  would  enable  the  ordinary  income  tax  to 
be  reduced  considerably  at  once.  Mr  Edward  Lees, 


226  POST-WAR   FINANCE 

secretary  to  the  Manchester  and  County  Bank,  has 
put  forward  a  scheme  by  which  taxpayers  can  buy 
in  advance  immunity  for  so  many  years  from  so  much 
annual  income  tax.  If  this  suggestion  could  be 
worked  it  might  provide  a  means  of  quickening  the 
debt's  repayment,  though  it  looks  rather  like  ex- 
changing one  form  of  debt  for  another.  But,  in  any 
case,  it  is  urgent  that  the  long  promised  reform  of 
income  tax  should  be  set  in  hand  at  once,  so  that  it 
may  be  purged  of  its  present  inequities  and  anomalies 
and  set  to  work  in  peace  to  redeem  debt  on  a  new  and 
more  scientific  basis. 


XVI 

THE  CURRENCY  REPORT 

December,  1918 

Currency  Policy  during  the  War — Its  Disastrous  Mediae  valism— 
The  Report  of  the  Cunliffe  Committee — A  Blast  of  Common 
Sense — The  Condemnation  of  our  War  Finance — Inflation 
and  the  Rise  in  Prices — The  Figures  of  the  Present  Position 
— The  Break  in  the  Old  Relation  between  Legal  Tender  and 
Gold — How  to  restore  it — Stop  Borrowing  and  reduce  the 
Floating  Debt — Return  to  the  Old  System — The  Committee's 
Sane  Conservatism — A  Sound  Currency  vital  to  National 
Recovery. 

AMONG  the  many  features  of  the  late  war  (how  com- 
fortable it  is  to  talk  about  the  "  late  war  "  !)  that 
seem  likely  to  astonish  the  historian  of  the  future, 
perhaps  the  thing  that  will  surprise  him  most  is  the 
behaviour  of  the  warring  Governments  in  currency 
matters.  It  is  surely  a  most  extraordinary  thing 
after  all  that  has  been  thought,  said  and  written 
about  monetary  policy  since  money  was  invented 
that  as  soon  as  a  great  economic  effort  was  necessary 
on  the  part  of  the  leading  civilised  Powers,  they 
should  all  have  fallen  back  on  the  old  mediaeval  dodge 
of  depreciating  the  currency,  varied  to  suit  modern 
needs,  in  order  to  pay  part  of  their  war  bill,  and 
should  have  continued  this  policy  throughout  the 
course  of  the  war,  in  spite  of  the  obvious  results  that 
it  was  producing  in  the  shape  of  unrest,  suspicion  and 


228  THE   CURRENCY    REPORT 

bitterness  on  the  part  of  the  working  classes,  who 
very  naturally  thought  that  the  consequent  rise  in 
prices  was  due  to  the  machinations  of  unscrupulous 
capitalists  who  were  exploiting  them.  It  is  even 
possible  that  the  historian  of  a  century  hence  may 
ascribe  to  this  cause  the  beginning  of  the  end  of  our 
present  economic  system,  based  on  the  private 
ownership  of  capital,  for  it  is  very  evident  that  we 
have  not  yet  seen  the  end  of  the  harvest  that  this 
bitterness  and  discontent  are  producing. 

A  less  important  but  still  very  objectionable 
consequence  of  the  flood  of  currency  and  credit  that 
the  Government  has  poured  out  to  fill  a  gap  in  its 
war  finance  is  the  encouragement  that  it  has  given 
to  a  host  of  monetary  quacks  who  believe  that  all 
the  financial  ills  of  the  world  can  be  saved  if  only  you 
give  it  enough  money  to  handle,  oblivious  of  the 
effect  on  prices  of  mere  multiplication  of  claims  to 
goods  without  a  corresponding  increase  in  the  volume 
of  goods.  These  enthusiasts  have  seen  that  during 
war  a  Government  can  produce  money  as  fast  as  it 
likes,  and  since  they  think  that  producing  money 
makes  every  one  happy  they  propose  to  adopt  this 
simple  method  for  paying  off  war  debt,  restarting 
trade  and  generally  creating  a  monetary  millennium. 
How  far  their  nostrums  are  likely  to  be  adopted,  no 
one  can  yet  say,  but  some  of  the  utterances  of  our 
rulers  make  one  shudder. 

Into  this  atmosphere  of  quackery  and  delusion 
the  report  of  the  Committee  on  Currency  and  Foreign 
Exchanges  breathes  a  refreshing  blast  of  sound 
common  sense.  Everybody  ought  to  read  it.  It 


WAR   FINANCE   CONDEMNED         229 

costs  but  twopence ;  it  is  only  a  dozen  pages  long, 
and  it  is  described  (if  you  want  to  order  it)  as  Cd. 
9182.  In  view  of  the  many  attacks  that  have  been 
made  on  our  banking  system — especially  the  Bank 
Act  of  1844 — by  Chambers  of  Commerce  and  others 
before  the  war,  it  is  rather  surprising  that  so  little 
criticism  should  have  been  heard  of  this  Report, 
which  practically  advocates  a  return,  as  rapidly  as 
possible,  to  the  practice  and  principles  imposed  by 
that  Act.  It  may  be  that  peace,  and  all  the  pre- 
occupations that  have  followed  it,  have  absorbed 
men's  minds  so  entirely  that  questions  of  currency 
seem  to  be  an  untimely  irrelevance  ;  or  possibly  the 
very  heavy  weight  of  the  Committee's  authority  may 
have  silenced  the  opposition  to  its  recommendations. 
Presided  over  by  Lord  Cunliffe,  the  late  Governor  of 
the  Bank,  and  including  Sir  John  Bradbury  and 
Professor  Pigou  and  an  imposing  list  of  notable 
bankers,  it  was  a  body  whose  opinion  could  only  be 
challenged  by  critics  gifted  with  the  most  serene 
self-confidence. 

One  of  the  most  interesting — especially  to 
advocates  of  sound  finance — points  in  its  Report  is 
the  implied  condemnation  that  it  pronounces  on  the 
methods  by  which  the  war  has  been  financed  by  our 
rulers.  It  points  out  that  "  the  need  of  the  Govern- 
ment for  funds  wherewith  to  finance  the  war  in  excess 
of  the  amounts  raised  by  taxation  or  by  loans  from 
the  public  has  made  necessary  the  creation  of  credits 
in  their  favour  with  the  Bank  of  England.  .  .  .  The 
balances  created  by  these  operations  passing  by 
means  of  payments  to  contractors  and  others  to  the 

Q 


23o  THE   CURRENCY   REPORT 

Joint  Stock  banks  have  formed  the  foundation  of  a 
great  growth  in  their  deposits,  which  have  also  been 
swelled  by  the  creation  of  credits  in  connection  with 
the  subscriptions  to  the  various  War  Loans.  .  .  . 
The  greatly  increased  volume  of  bank  deposits, 
representing  a  corresponding  increase  of  purchasing 
power  and,  therefore,  tending  in  conjunction  with 
other  causes  to  a  great  rise  of  prices,  has  brought 
about  a  corresponding  demand  for  legal  tender 
currency  which  could  not  have  been  satisfied  under 
the  stringent  provisions  of  the  Act  of  1844."  Here 
we  have  the  story  of  bad  war  finance  put  as  clearly 
as  it  can  be.  Because  the  Government  was  not  able 
to  raise  all  the  money  needed  for  the  war  on  sound 
lines — that  is,  by  taxation  and  loans  to  it  of  money 
saved  by  investors — it  had  recourse  to  credits  raised 
for  it  by  the  Bank  of  England  and  the  other  banks 
against  Treasury  Bills,  Ways  and  Means  Advances, 
War  Loans,  War  Bonds,  and  loans  to  customers  who 
were  taking  up  War  Loans,  etc.  Thereby  as  these 
credits  created  fresh  deposits  there  was  a  huge 
increase  in  the  community's  purchasing  power  ;  and 
since  the  supply  of  goods  to  be  purchased  was 
stationary  or  reduced,  the  only  result  was  a  great 
increase  in  prices  which  made  the  war,  perhaps, 
nearly  twice  as  costly  as  it  need  have  been  and  pro- 
duced all  the  suspicion  and  unrest  that  has  already 
been  referred  to.  Considering  that  the  Committee 
included  an  ex-Governor  of  the  Bank  and  the  Perma- 
nent Secretary  to  the  Treasury  it  could  hardly  have 
been  expected  to  use  much  plainer  language  concern- 
ing the  failure  of  our  rulers  to  get  money  out  of  us 


CREDIT   DEMANDS   CASH  231 

in  the  right  way  for  the  war  and  the  vigour  with 
which  they  made  use  of  the  demoralising  weapon  of 
inflation. 

It  followed  as  a  necessary  consequence  that  the 
volume  of  legal  tender  currency  had  to  be  greatly 
increased.  As  prices  rose  wages  rose  with  them,  and 
so  much  more  "  cash  "  was  needed  in  order  to  pay 
for  a  turnover  of  goods  which,  fairly  constant  in 
volume,  demanded  more  currency  because  of  their 
inflated  prices.  As  the  Committee  says  in  its  Report 
(page  5)  :  "  Given  the  necessity  for  the  creation  of 
bank  credits  in  favour  of  the  Government  for  the 
purpose  of  financing  war  expenditure,  these  issues 
could  not  be  avoided.  If  they  had  not  been  made, 
the  banks  would  have  been  unable  to  obtain  legal 
tender  with  which  to  meet  cheques  drawn  for  cash 
on  their  customers'  accounts.  The  unlimited  issue 
of  currency  notes  in  exchange  for  credits  at  the  Bank 
of  England  is  at  once  a  consequence  and  an  essential 
condition  of  the  methods  which  the  Government 
have  found  necessary  to  adopt  in  order  to  meet  their 
war  expenditure. " 

The  effect  of  these  causes  upon  the  amount  of 
legal  tender  currency  (other  than  subsidiary  coin) 
in  the  banks  and  in  circulation  is  summarised  by  the 
Committee  in  the  following  table  : — 

"  The  amounts  on  June  30,  1914,  may  be  estimated 
as  follows : — 

Fiduciary    Issue    of    the    Bank    of 

England       £18,450,000 

Bank  of  England  Notes  issued  against 
gold  coin  or  bullion  


232  THE   CURRENCY    REPORT 

Estimated  amount  of  gold  coin  held 
by  Banks  (excluding  gold  coin  held 
in  the  Issue  Department  of  the 
Bank  of  England)  and  in  public 
circulation 123,000,000 


Grand  total  £179,926,000 

"  The  corresponding  figures  on  July  10, 1918,  as  nearly 
as  they  can  be  estimated,  were  : — 

Fiduciary    Issue    of    the    Bank    of 

England       18,450,000 

Currency  Notes  not  covered  by  gold        230,412,000 

Total  Fiduciary  Issues  *  ...  £248,862,000 

Bank  of  England  Notes  issued  against 

coin  and  bullion  65,368,000 

Currency  Notes  covered  by  gold  ...  28,500,000 
Estimated  amount  of  gold  coin  held 

by  Banks  (excluding  gold  coin  held 

by  Issue  Department  of  Bank  of 

England),  say         40,000,000 

Grand  total  £382,730,000 

"  There  is  also  a  certain  amount  of  gold  coin  still  in 
the  hands  of  the  public  which  ought  to  be  added  to  the 
last-mentioned  figure,  but  the  amount  is  unknown." 

It  will  be  noted  that  the  gold  held  by  the  banks  (other 
than  the  Bank  of  England)  and  by  the  public  has 
declined  from  £123  to  £40  millions,  according  to  the 

*  The  notes  issued  by  Scottish  and  Irish  banks  which  have  been 
made  legal  tender  during  the  war  have  not  been  included  in  the 
foregoing  figures.  Strictly  the  amount  (about  £5,000,000)  by 
which  these  issues  exceed  the  amount  of  gold  and  currency  notes 
held  by  those  banks  should  be  added  to  the  figures  of  the  present 
fiduciary  issues  given  above. 


AN   EXAMPLE   OF   MODERATION      233 

Committee's  estimate,  while,  on  the  other  hand,  the 
circulation  of  bank  notes  has  risen  by  £27  millions 
and  the  issue  of  currency  notes  has  taken  place  to 
the  tune  of  £259  millions  (at  the  date  of  the  Report  ; 
it  is  now  nearly  £300  millions),  making  a  net  addition 
to  legal  tender  currency  of  over  £200  millions.  When 
we  also  remember  that  there  has  been  a  very  heavy 
coinage  of  silver  and  copper,  that  the  Bank  of 
England's  deposits  have  risen  by  over  £100  millions 
and  the  deposits  of  the  other  banks  by  nearly 
£700  millions,  and  all  this  at  a  time  when  most  of  the 
industrial  activity  of  the  country  was  going  into  the 
production  of  destructive  weapons  and  the  support 
of  those  who  were  using  them,  the  behaviour  of 
commodities  of  ordinary  use  in  rising  by  nearly 
100  per  cent,  seems  to  be  an  example  of  remarkable 
moderation.  With  all  this  new  buying  power  in  the 
hands  of  the  community  there  is  little  wonder  that 
some  people  should  think  that  we  have  enormously 
increased  our  wealth  during  this  most  destructive 
and  costly  war,  and  should  then  feel  hurt  and  dis- 
appointed when  they  find  that  this  new  buying 
power  is  robbed  of  all  its  beauty  by  the  fact  that  its 
efficiency  as  buying  power  is  seriously  diminished 
by  its  mere  quantity. 

Such  being  the  state  of  affairs— a  great  mass  of 
new  credit  and  currency  based  on  securities — it  is 
clear  that  our  currency  has  been  deprived  for  the 
time  being  of  that  direct  relation  with  its  gold  basis 
that  used  in  former  time  to  regulate  its  volume 
according  to  world  prices  and  our  international  trade 
position.  As  the  Committee  says,  "  It  is  not  possible 


234  THE    CURRENCY    REPORT 

to  judge  to  what  extent  legal  tender  currency  may  in 
fact  be  depreciated  in  terms  of  bullion.  But  it  is 
practically  certain  that  there  has  been  some  de- 
preciation, and  to  this  extent  therefore  the  gold 
standard  has  ceased  to  be  effective."  Very  well, 
then,  what  has  to  be  done  to  get  back  to  the  old  state 
of  things  under  which  there  was  a  more  or  less  auto- 
matic check  on  the  creation  of  credit  and  the  issue  of 
currency  ?  This  check  worked  by  a  system  which 
was  elastic  and  simple.  It  was  not  entirely  auto- 
matic, because  its  working  had  to  be  controlled  by 
the  Bank  of  England,  which,  by  the  action  of  its 
discount  rate,  could,  more  or  less,  quicken  or  check 
the  working  of  the  machine.  Legal  tender  currency 
could  only  be  increased  by  imports  of  gold ;  and 
exports  of  gold  reduced  the  available  amount  of  legal 
tender  currency ;  and  since  a  stock  of  legal  tender 
currency  was  essential  to  meet  the  demands  upon 
them  that  bankers  made  possible  by  creating  credits, 
there  was  thus  an  indirect  and  variable  connection 
between  the  country's  gold  stock  and  the  extent  to 
which  bankers  would  think  it  prudent  to  multiply 
credits.  If  credits  were  multiplied  too  fast,  our 
currency  was  depreciated  in  value  as  compared  with 
those  of  other  countries  and  the  exchanges  went 
against  us  and  gold  either  was  exported  or  began  to 
look  as  if  it  might  be  exported.  If  it  was  exported 
the  legal  tender  basis  of  credit  was  reduced  and  the 
creation  of  credit  was  checked.  If  the  Directors  of 
the  Bank  of  England  thought  it  inadvisable  that  gold 
should  be  exported  they  could,  by  raising  the  rate 
of  discount  and  taking  artificial  measures  to  control 


THE    LINK  WITH    GOLD  235 

the  supply  of  credit,  produce,  without  the  actual 
loss  of  gold,  the  effects  which  that  loss  would  have 
brought  about. 

The  keystone  of  the  system  was  the  rigid  link 
between  legal  tender  currency  and  gold.  This  was 
secured  by  the  provisions  of  the  Bank  Act  of  18441 
which  laid  down  that  above  a  certain  line — which 
was  before  the  war  roughly  £i8|  millions — every 
Bank  of  England  note  issued  should  have  gold  behind 
it,  pound  for  pound.  In  other  words,  the  Bank  of 
England  note  was,  for  practical  purposes,  a  bullion 
certificate.  The  legal  limit  on  the  fiduciary  issue 
(that  is,  the  issue  of  £i8J  millions  against  securities, 
not  gold)  could  only  be  exceeded  by  a  breach  of  the 
law.  The  many  critics  of  our  banking  system  seized 
on  this  hard-and-fast  restriction  and  accused  it  of 
making  our  system  inelastic  as  compared  with  the 
German  arrangement,  under  which  the  legal  limit 
could  at  any  time  be  exceeded  on  payment  of  a  tax 
or  fine  on  any  excess  perpetrated.  These  critics 
might  have  been  right  if  legal  tender  currency  had 
been  the  only,  or  even  the  predominant,  means  of 
payment  in  England.  But,  as  every  office  boy 
knows,  it  was  not.  Legal  tender — gold  and  Bank  of 
England  notes — was  hardly  ever  seen  in  commercial 
and  financial  transactions  on  a  serious  scale.  We 
paid,  sometimes,  our  retail  purchases  of  goods  and 
services  in  gold ;  and  Bank  notes  were  a  popular 
mode  of  payment  on  racecourses  and  in  other  places 
where  transactions  took  place  between  people  who 
were  not  very  certain  of  one  another's  standing  or 
good  faith.  But  the  great  bulk  of  payments  was 


236  THE    CURRENCY    REPORT 

made  in  the  cheque  currency  which  our  bankers  had 
developed  outside  of  the  law  and  could  create  as  fast 
as  prudence — and  an  eye  to  the  supply  of  legal  tender 
which  every  holder  of  a  cheque  had  a  right  to  demand 
— allowed  them  to  do  so.  While  cheques  provided 
the  currency  of  commerce,  another  form  of  "  money  " 
was  produced,  again  without  any  restriction  by  the 
Act,  by  the  pleasant  convention  which  caused  a 
credit  in  the  Bank  of  England's  books  to  be  regarded 
as  "  cash  "  for  balance-sheet  purposes  by  the  banks. 
These  advantages  gave  the  English  system  a  freedom 
and  elasticity,  in  spite  of  the  strictness  of  the  law  that 
regulated  the  issue  of  paper  currency,  that  enabled 
it  to  work  in  a  manner  that,  judged  by  the  test  of 
practical  results,  had  one  great  advantage  over  that 
of  any  of  the  rival  centres.  It  alone  in  days  before 
the  war  fulfilled  the  functions  of  an  international 
banker  by  being  ready  at  all  times  and  without 
question  to  pay  out  the  gold  that  was,  in  the  last 
resort,  the  final  means  of  settling  international 
balances. 

It  is  the  object  of  Lord  Cunliffe's  Committee  to 
restore  as  quickly  as  possible  the  system  which  has 
thus  been  tried  by  the  test  of  experience.  "  After 
the  war/'  they  say  in  their  Report,  "  our  gold  hold- 
ings will  no  longer  be  protected  by  the  submarine 
danger,  and  it  will  not  be  possible  indefinitely  to 
continue  to  support  the  exchanges  with  foreign 
countries  by  borrowing  abroad.  Unless  the 
machinery  which  long  experience  has  shown  to  be 
the  only  effective  remedy  for  an  adverse  balance  of 
trade  and  an  undue  growth  of  credit  is  once  more 


THE   FIRST   MEASURE  237 

brought  into  play  there  will  be  very  grave  danger  of 
a  credit  expansion  in  this  country  and  a  foreign  drain 
of  gold  which  might  jeopardise  the  convertibility  of 
our  note  issues  and  the  international  trade  position 
of  the  country.  ...  We  are  glad  to  find  that  there 
was  no  difference  of  opinion  among  the  witnesses  who 
appeared  before  us  as  to  the  vital  importance  of 
these  matters/'    The  first  measure  that  they  put 
forward  as  essential  to  this  end  is  the  cessation  at  the 
earliest  possible  moment  of  Government  borrowings. 
"  A  large  part  of  the  credit  expansion  arises,  as  we 
have  shown,  from  the  fact  that  the  expenditure  of  the 
Government    during    the    war    has    exceeded    the 
amounts  which  they  have  been  able  to  raise  by 
taxation  or  by  loans  from  the  actual  savings  of  the 
people.     They  have  been  obliged  therefore  to  obtain 
money  through  the  creation  of  credits  by  the  Bank  of 
England  and  the  Joint  Stock  banks,  with  the  result 
that  the  growth  of  purchasing  power  has  exceeded 
that   of   purchasable   goods   and   services."    It   is 
therefore  essential  that  as  soon  as  possible  the  State 
should  not  only  live  within  its  income  but  should 
begin  to  reduce  indebtedness,  especially  the  floating 
debt,  which,  being  largely  held  by  the  banks,  has 
been  a  cause  of  credit  creation  on  a  great  scale. 
"  The  shortage  of  real  capital  must  be  made  good  by 
genuine  savings.     It  cannot  be  met  by  the  creation 
of  fresh  purchasing  power  in  the  form  of  bank 
advances  to  the  Government  or  to  rrianufacturers 
under  Government  guarantee  or  otherwise,  and  any 
resort  to  such  expedients  can  only  aggravate  the 
evil  and  retard,  possibly  for  generations,  the  recovery 


238  THE   CURRENCY   REPORT 

of  the  country  from  the  losses  sustained  during  the 
war/'  With  these  weighty  words  the  Committee 
brushes  aside  a  host  of  schemes  that  have  been  urged 
for  putting  everything  right  by  devising  new 
machinery  for  the  manufacture  of  new  credit.  That 
new  credits  will  be  needed  for  industry  after  war  is 
obvious,  but  what  else  are  our  banks  for,  if  not  to 
provide  it  ?  They  can  only  be  set  free  to  provide  it 
on  the  scale  required  if,  by  the  necessary  reduction 
of  the  floating  debt,  they  are  relieved  of  the  locking 
up  of  their  funds  in  Government  securities,  which  has 
been  one  of  the  bad  results  of  our  bad  war  finance. 

It  goes  without  saying  that  the  Committee  does 
not  recommend  the  continuance  in  peace  of  the 
differential  rates  for  home  and  foreign  money  that 
were  introduced  as  a  war  measure  with  a  view  to 
lowering  a  rate  at  which  the  Government  borrowed 
at  home  for  war  purposes.  It  would  evidently  be 
too  severe  a  strain  on  human  nature  to  attempt  to 
work  such  a  system,  except  in  war-time,  when  the 
artificial  conditions  by  which  the  market  was  sur- 
rounded made  it  both  feasible  and  desirable  to  do  so. 
With  regard  to  the  note  issue,  the  Committee  pro- 
poses a  return  to  the  old  system  and  a  strictly  drawn 
line  for  the  amount  of  the  fiduciary  note  issue,  the 
whole  note  issue  (with  the  exception  of  the  few 
surviving  private  note  issues)  being  put  into  the 
hands  of  the  Bank  of  England,  all  notes  being  payable 
in  gold  in  London  only  and  being  made  legal  tender 
throughout  the  United  Kingdom.  These  sugges- 
tions are  subject  to  any  special  arrangements  that 
may  be  made  with  regard  to  Scotland  and  Ireland. 


THE   BANK  AND   THE   BULLION     239 

An  early  resumption  of  the  circulation  of  gold  for 
internal  purposes  is  not  contemplated.  The  public 
has  become  used  to  paper  money,  which  is  in  some 
ways  more  convenient  and  cheaper  ;  and  the  luxury 
of  a  gold  circulation  is  one  that  we  can  hardly  afford 
at  present.  Gold  will  be  kept  by  the  Bank  of 
England  in  a  central  reserve,  and  all  the  other  banks 
should,  it  is  suggested,  transfer  to  it  the  whole  of 
their  present  holdings  of  the  metal.  In  order  to  give 
the  Bank  of  England  a  closer  control  of  the  bullion 
market  the  Committee  thinks  it  desirable  that  the 
export  of  gold  coin  or  bullion  should,  in  future,  be 
subject  to  the  condition  that  such  coin  or  bullion 
had  been  obtained  from  the  Bank  for  the  purpose. 
This  measure  would  give  the  Bank  of  England  a  very 
close  control  of  the  bullion  market,  so  close  that 
there  is  a  danger  that  if  this  control  were  too 
rigorously  exercised,  gold  that  now  comes  to  this 
country  might  be  diverted,  with  a  view  to  more 
advantageous  sale,  to  other  centres.  The  amount 
of  the  fiduciary  issue  is  a  matter  that  the  Committee 
leaves  open  to  be  determined  after  experience  of 
post-war  conditions.  They  "  think  that  the  strin- 
gent principles  of  the  Act  (of  1844)  have  often  had 
the  effect  of  preventing  dangerous  developments, 
and  the  fact  that  they  have  had  to  be  temporarily 
suspended  on  certain  rare  and  exceptional  occasions 
(and  those  limited  to  the  earlier  years  of  the  Act's 
operation,  when  experience  of  working  the  system 
was  still  immature)  does  not,"  in  their  opinion, 
invalidate  this  conclusion.  So  they  propose  that  the 
separation  of  the  Issue  or  Banking  Departments 


240  THE   CURRENCY    REPORT 

should  be  maintained,  but  that  in  future  if  an 
emergency  arose  requiring  an  increase  in  the  amount 
of  fiduciary  currency,  this  should  not  involve  a 
breach  of  the  law,  but  should  be  made  legal  (as  it  is 
now  under  the  Currency  and  Bank  Notes  Act  of 
1914),  subject  to  the  consent  of  the  Treasury. 

It  is  not  proposed  at  present  to  secure  the  circula- 
tion of  paper  instead  of  gold  by  legislation.  The 
Committee  considers  that  "  informal  action  on  the 
part  of  the  banks  may  be  expected  to  accomplish  all 
that  is  required."  If  necessary,  however,  it  points 
out  that  the  circulation  of  gold  could  be  prevented  by 
making  the  notes  convertible,  at  the  discretion  of  the 
Bank  of  England,  into  coin  or  bar  gold.  The 
amount  which,  in  the  opinion  of  the  Committee, 
should  be  aimed  at  for  the  central  gold  reserve  is 
£150  millions  (a  sum  which  is  already  almost  in  sight 
on  its  figures  quoted  above)  ;  and  "  until  this  amount 
has  been  reached  and  maintained  concurrently  with 
a  satisfactory  foreign  exchange  position  for  a  period 
of  at  least  a  year,"  it  thinks  that  the  policy  of  re- 
ducing the  uncovered  note  issue  "  as  and  when 
opportunity  offers  "  should  be  consistently  followed. 
How  this  opportunity  is  going  to  "  offer  "  is  not 
made  clear ;  but  presumably  a  reflow  of  notes  from 
circulation  can  only  happen  through  a  fall  in  prices 
or  a  reduction  in  bank  deposits  by  the  liquidation  of 
advances  made  to  the  Government,  directly  or 
indirectly,  by  the  banks. 

Concerning  the  difficult  problem  of  replacing  the 
Bradbury  notes  by  Bank  of  England  notes  of 
£1  and  ios.,  an  ingenious  suggestion  is  made  by  the 


FINANCIAL   HOTSPURS  241 

Committee.  It  observes  that  there  would  be  some 
awkwardness  in  transferring  the  issue  to  the  Bank  of 
England  before  the  future  dimensions  of  the  fiduciary 
issue  have  been  arrived  at ;  and  it  suggests  that 
during  the  transitional  period  any  expansion^  in 
Treasury  notes  that  may  take  place  should  be 
covered,  not  as  now,  by  Government  securities,  but 
by  Bank  of  England  notes  taken  from  the  Bank. 
By  this  means  any  demands  for  new  currency  would 
operate  in  the  normal  way  to  reduce  the  reserve  of 
the  Banking  Department,  "  which  would  have  to  be 
restored  by  raising  money  rates  and  encouraging 
gold  imports,"  and  so  a  step  would  have  been  taken 
to  getting  back  to  a  business  basis  in  the  currency 
system  and  away  from  the  profligate  printing-press 
policy  of  the  war  period. 

Such  are  the  suggestions  made  by  this  distin- 
guished body  for  the  restoration  of  our  currency. 
Little  has  been  said  against  them  in  the  way  of 
serious  criticism,  but  their  conservative  tendency 
and  the  fact  that  they  practically  recommend  a 
return  to  the  status  quo  has  caused  some  impatience 
among  the  financial  Hotspurs  who  proposed  to  begin 
to  build  a  new  world  by  turning  everything  upside 
down.  In  matters  of  finance  this  process  is  question- 
able, interesting  as  the  result  would  undoubtedly  be. 
To  get  to  work  on  tried  lines  and  then,  when  once 
industry  and  finance  have  recovered  their  old 
activity,  to  amend  the  machine  whenever  it  is 
creaking  seems  to  be  a  more  sensible  plan  than  to 
delay  our  start  until  we  have  fashioned  a  new  heaven 
and  earth,  and  then  very  probably  find  that  they 


242  THE   CURRENCY   REPORT 

do  not  work.  If  the  machine  is  to  be  set  moving,  it 
can  only  be  done  by  close  co-operation  between  the 
Bank  of  England  and  the  other  banks  which  have 
grown  by  amalgamation  into  institutions  the  size 
of  which  seem  likely  to  make  the  task  of  central 
control  more  difficult  than  ever.  On  this  important 
point  the  Committee  is  curiously  silent.  But  it 
recommends  the  adoption  of  a  suggestion  made  by  a 
Committee  of  Bankers,  who  proposed  that  banks 
should  in  future  be  required  "  to  publish  a  monthly 
statement  showing  the  average  of  their  weekly 
balance-sheets  during  the  month."  (Will  this 
requisition  apply  to  the  Bank  of  England  ?)  This  is 
a  welcome  suggestion  as  far  as  it  goes,  but  unless 
something  is  done  by  co-operative  action  to  make  the 
Bank  rate  more  automatic  in  its  influence  on  the 
actions  of  the  other  banks,  the  difficulty  of  making  it 
effective  seems  likely  to  be  considerable. 

Getting  the  currency  right  is  a  most  important 
matter  for  the  future  of  our  financial  position. 
Another  is  the  question  of  our  debt  to  foreigners. 
Most  of  this  debt  we  owe  to  America,  and  we  only 
owe  it  because  we  had  to  finance  our  Allies.  We 
surely  ought  to  be  able  to  arrange  with  America  that 
anything  that  we  have  to  do  in  giving  our  Allies  time 
before  asking  for  repayment  they  also  should  do  for 
us — within  limits,  say,  up  to  thirty  years.  In  view 
of  all  that  they  have  made  and  we  have  lost  by  this 
war  waged  for  the  cause  of  all  mankind,  this  would 
seem  to  be  a  reasonable  concession  on  America's 
part. 


XVII 

MEETING  THE  WAR  BILL 

January,  1919 

The  Total  War  Debt— What  are  our  Loans  to  the  Allies  worth  ? 
— Other  Uncertain  Items — The  Prospects  of  making  Germany 
pay — The  Right  Way  to  regard  the  Debt — Our  Capital 
largely  intact— A  Reform  of  the  Income  Tax— The  Debt  to 
America — The  Levy  on  Capital  and  other  Schemes — The 
only  Real  Aids  to  Recovery. 

A  TABLE  published  week  by  week  by  the  Economist 
shows  that  from  August  i,  1914,  to  November  9, 
1918,  the  Government  paid  out  £8612  millions 
sterling.  From  this  we  have  to  deduct  an  estimate 
of  the  amount  that  the  Government  would  have 
spent  if  there  had  not  been  a  war,  so  that  we  are  at 
once  landed  in  the  realm  of  conjecture.  The  last 
pre-war  financial  year  saw  an  expenditure  of 
£198  millions,  and  it  is  safe  to  assume  that  this 
figure  would  have  swollen  by  a  few  millions  a  year 
if  peace  had  continued,  so  that  we  may  take  at  least 
j£86o  millions  from  the  above  total  as  normal  peace 
expenditure  for  the  4^  years.  This  gives  us  ^7752 
millions  as  the  gross  cost  of  the  war,  as  far  as  the 
period  of  actual  fighting  is  concerned.  From  this 
figure,  however,  we  are  able  to  make  some  big  deduc- 
tions. There  are  loans  to  Allies  and  Dominions,  and 
some  other  much  more  readily  realisable  assets  than 


244  MEETING    THE  WAR  BILL 

these.  We  do  not  know  the  actual  figure  of  the 
loans  to  Allies  and  Dominions  during  the  war  period, 
because  they  are  not  included  in  the  weekly  financial 
statements.  The  amount  that  we  borrow  abroad  is 
set  out  week  by  week — at  least,  that  is  believed  to  be 
the  meaning  of  the  cryptic  item  "  Other  Debt " — 
but  the  amount  that  we  lend  to  Allies  and  Dominions 
is  hidden  away  in  the  Supply  Services  or  somewhere, 
and  we  only  get  occasional  information  about  it  from 
the  Chancellor  in  the  course  of  his  speeches  on  the 
Budget  or  on  Votes  of  Credit.  In  his  last  Vote  of 
Credit  speech,  on  November  12,  1918,  Mr  Bonar 
Law  gave  the  chief  items  of  the  loans  to  Allies,  and  a 
very  interesting  list  it  was.  The  totals  up  to 
October  19,  1918,  were  £1465  millions  to  Allies 
and  j£2i8J  millions  to  Dominions.  The  Allies  were 
indebted  to  us  as  follows  : — Russia,  £568  millions ; 
France,  £425  millions  ;  Italy,  £345  millions  ;  smaller 
States,  £127  millions.* 

Some  of  these  debts  may  be  written  off  at  once, 
and  that  cheerfully,  seeing  that  they  have  been  lent 
brothers-in-arms  who  have  been  hit  much  harder 
than  we  have  by  the  war,  and  had  nothing  like  our 
financial  strength.  The  question  is,  what  figure 
ought  we  to  put  on  this  asset  in  deducting  it  from 
gross  war  expenditure  in  order  to  arrive  at  a  guess  at 
the  real  cost  ?  W7e  take  our  loans  to  Dominions,  of 
course,  as  good  to  the  last  penny.  Mr  Bonar  Law, 
in  his  Budget  speech  last  April,  took  our  loans  to 
Allies  at  half  their  face  value.  Strict  book-keeping 
would  probably  demand  a  lower  figure  than  50  per 
*  Parliamentary  Debates,  Vol.  no,  No.  114,  p.  2560. 


ASSETS   IN   HAND  245 

cent.  ;  but  let  us  follow  the  ex-Chancellor's  example 
and  take  loans  to  Allies,  which  we  will  estimate  at 
£1480  millions  up  to  November  gth,  as  good  for 
£740  millions,  and  loans  to  Dominions  at  £220 
millions  up  to  the  same  date,  a  total  of  £960  millions, 
to  be  deducted  from  gross  war  cost.  Concerning 
£740  millions  of  this  sum,  however,  there  is  a  certain 
amount  of  doubt.  No  one  questions  for  a  moment 
the  solvency  of  France  and  Italy,  but  in  view  of  the 
pressure  that  the  war  has  exercised  on  their  producing 
power,  and,  in  the  case  of  France,  the  complication 
added  by  the  uncertainties  of  the  position  in  Russia, 
in  which  French  investors  are  so  deeply  interested, 
one  cannot  feel  sure  that  they  will  be  able  at  once  to 
make  interest  payments.  Much  will  depend  on  the 
sums  that  they  are  able  to  recover  from  Germany 
against  their  bill  of  damages,  on  which  more  anon. 
But  in  any  case  it  seems  likely  that  a  general  scheme 
of  interest  funding,  as  between  the  Allies,  may  have 
to  be  adopted  for  some  years  to  come. 

As  to  the  other  assets  that  we  have  to  set  against 
our  gross  expenditure  during  the  fighting  period, 
they  were  enumerated  by  the  Chancellor  in  his 
Budget  speech  last  April  in  the  following  terms  : — 

Balances   in   agents'    hands,   debts 

due,  foodstuffs,  etc £375  millions. 

Land,  securities,  buildings  and  ships  97 
Stores    in    Munitions    Department 

(cost  price  325  millions)  taken  at  100 

Additions  this  financial  year  100 

Arrears  of  taxation            5°° 

Total          £1172 

*  Parliamentary  Debates,,  Vol.  105,  No.  33,  PP-  698-699 

R 


246  MEETING   THE   WAR   BILL 

It  will  be  remembered  that  in  his  Budget  speech  the 
Chancellor  was  proceeding  on  the  assumption  that 
the  war  would  last  till  March  3ist  next — the  date  at 
which  our  financial  year  ends — and  would  then  be 
convenient  enough  to  stop.  Happily  for  us,  the 
valour  of  our  soldiers  and  those  .of  our  Allies,  the 
splendid  success  of  our  Fleet  and  our  merchantmen 
in  bringing  over  American  troops  and  their  food  and 
equipment  with  astonishing  speed,  and  the  straight- 
forward diplomacy  of  President  Wilson,  combined 
to  achieve  victory  nearly  five  months  earlier  than 
the  most  sanguine  had  dared  to  expect.  With  the 
very  pleasant  result — though  it  is  a  small  matter 
when  compared  with  the  end  of  the  killing  of  the 
best  of  our  manhood — that  the  financial  position  is 
very  greatly  improved.  With  regard  to  the  figures 
given  above,  it  should  be  observed  that  the  "  debts  " 
are  advances  to  Dominions,  but  on  quite  a  different 
basis  from  our  loans  to  them,  being  money  owed  by 
them  against  goods  and  services  supplied.*  They 
and  the  balances  in  the  hands  of  agents  are  both  as 
good  as  gold.  Concerning  the  others,  one  is  entitled 
at  first  sight  to  feel  a  good  deal  of  scepticism,  since 
such  articles  as  land,  buildings,  ships  and  stores, 
bought  or  built  by  Government  during  a  war,  are 
likely  to  find  an  extremely  sluggish  demand  when  the 
war  is  over.  However,  Mr  Bonar  Law  assured  the 
House  that  his  valuation  of  these  amounts  had  been 
arrived  at  on  a  conservative  basis,  and,  what  is  better 
still,  in  his  Vote  of  Credit  speech  on  November  I2th, 
he  was  able  to  state  that  revised  estimates  had  shown 

*  Parliamentary  Debates,  Vol.  105,  No.  33,  p.  698, 


THE  NET  RESULT  247 

that  their  value  would  be  "  far  greater  "  than  he  had 
previously  expected.  So  perhaps  we  are  entitled  to 
take  them  at  £1300  millions. 

If  so,  we  get  the  following  results  for  the  cost  of 
the  fighting  period  : — 

Total  Government  expenditure, 
August  i,  1914,  to  November 
9,1918  £8612  millions. 

Less  estimate  of  normal  peace  expen- 
diture    860  ,, 

7752 

Less  Loans  to  Do- 
minions ...      220  millions. 
Less  Loans  to  Allies 

(half  face  value)         740        „ 
Realisable  assets  ...     1300        „ 

2260 

Net  cost  of  period        ...          ...    £5492        „ 

If  war  cost  would  be  good  enough  to  cease  with  the 
fighting  we  should  thus  now  be  able  to  see,  more  or 
less,  how  we  stand.  During  the  fighting  period  the 
Government  raised  by  taxation  the  sum  of  £2120 
millions,*  from  which  we  have  again  to  deduct 
£860  millions  as  an  estimate  for  normal  peace 
taxation,  if  the  war  had  not  happened,  leaving 
£1350  millions  as  the  net  war  taxation,  and  £4142 
millions  as  the  net  addition  to  debt  from  the  war. 

But,  of  course,  there  are  .still  some  large  and 
uncertain  sums  to  come  in  to  both  sides  of  the 
account.  There  is  the  cost  of  maintaining  our  Army 

*  Economist,  Nov.  16,  1918. 


248  MEETING  THE   WAR  BILL 

and  Navy  during  the  armistice  period,  the  cost  of 
demobilisation,  and  the  cost  of  putting  an  end  to 
war  munitions  contracts  running  for  many  months 
ahead,  holders  of  which  will  have  to  be  compensated. 
Who  has  enough  assurance  to  venture  on  an  estimate 
of  the  cost  of  these  items  ?  Shall  we  guess  them  at 
something  between  £1000  and  £1500  millions  ?  And 
when  we  have  made  this  guess  are  we  at  the  end  of 
the  war's  cost  ?  Ought  we  not  to  include  pensions 
to  be  paid,  and  if  so,  at  what  figure  ?  Fifty  millions 
a  year  for  thirty  years  ?  If  so,  there  is  another 
£1500  millions.  And  interest  on  war  debt,  and  for 
how  long  ? 

On  the  other  side  of  the  balance-sheet,  the  only 
asset  that  has  not  yet  been  included  in  the  calculation 
is  the  sum  that  we  are  going  to  receive  from  Germany. 
Some  cheery  optimists  think  that  it  is  possible  for  us 
and  for  the  Allies  to  make  Germany  pay  the  whole 
of  our  war  cost.  If  so,  we  have  halcyon  days  ahead, 
for  not  only  shall  we  be  able  to  repay  the  whole  war 
debt  but  also  to  pay  back  to  the  taxpayer  all  the 
£1350  millions  that  he  produced  during  the  war, 
unless,  as  seems  more  likely,  the  Government  finds 
other  uses,  or  abuses,  for  the  money,  and  sets  its 
motley  horde  of  wasters  to  work  again.  But  this 
problem,  of  course,  is  not  going  to  arise.  It  would 
not  be  physically  possible  for  Germany  to  pay  the 
whole  of  the  Allies'  war  cost,  except  in  the  course  of 
many  generations,  and,  moreover,  the  Allies  have 
bound  themselves  not  to  make  any  such  demand 
by  the  rider  that  they  added  to  President  Wilson's 
peace  terms,  in  giving  their  assent  to  them  as  the 


THE   REPARATION    BILL  249 

basis  on  which  they  were  prepared  to  make  peace. 
Early  in  November  they  stated  that  President 
Wilson's  reference  to  "  restoration "  of  invaded 
countries  should,  in  their  view,  be  expanded  into  a 
claim  for  compensation  "  for  all  damage  done  to  the 
civilian  population  of  the  Allies  and  to  their  property 
by  the  aggression  of  Germany  by  land,  by  sea,  and 
from  the  air/'  *  This  is  letting  Germany  off  lightly  ; 
but,  after  stating  their  readiness  to  make  peace  on 
the  basis  of  the  fourteen  points,  if  amended  as  above 
(and  also  with  regard  to  the  Freedom  of  the  Seas 
question)  it  is  not  possible  for  the  European  Allies,  as 
the  Prime  Minister's  late  manifesto  says  they  propose 
to  do,  f  to  expand  this  claim  for  civilian  damage  into 
a  demand  for  the  whole  of  their  war  cost  up  to  the 
limit  of  the  capacity  of  the  Central  Powers  to  pay, 
without  a  serious  breach  of  faith.  So  that  the 
question  of  how  much  we  can  get  out  of  Germany  is 
complicated  by  the  further  uncertainty  of  the  size 
of  the  bill  for  damages  that  we  can  present.  It  will 
be  big  enough.  We  know  that  the  Germans  have 
sunk  8 1  million  tons  of  British  ships  during  the  war. 
As  to  the  price  at  which,  for  "  restoration  "  purposes, 
we  shall  value  those  ships  and  their  cargoes,  and  all 
the  civilian  property  damaged  by  aircraft  and  bom- 
bardment, this  is  a  matter  which  it  would  be 
obviously  improper  to  discuss  ;  but  we  may  be  sure 
that  the  bill  will  mount  up  to  many  hundreds  of 
millions,  and  it  remains  to  be  seen  whether,  after 
Belgium  and  France  have  presented  their  account, 

*  Times,  November  7,  1918. 
f  Times,  December  6,  1918, 


250  MEETING   THE   WAR   BILL 

it  will  be  possible  for  us  to  secure  payment  even  for 
all  the  civilian  damage  that  we  have  suffered. 

It  thus  appears  that  the  net  cost  of  the  fighting 
period  has  been  somewhere  in  the  neighbourhood 
of  £5500  millions,  taking  our  loans  to  Allies  at  half 
their  face  value ;  and  that  the  armistice  and  de- 
mobilisation period  is  likely  to  cost  another  £1000  to 
£1500  millions  more,  to  say  nothing  of  pensions  and 
debt  charge  that  will  go  on  for  years  (unless  the 
supporters  of  Levy  on  Capital  have  their  way  and 
wipe  the  debt  out),  and  that  against  this  further 
expenditure  we  can  set  whatever  sum  is  recovered 
from  Germany. 

Seeing  that  our  total  pre-war  debt  was  £710  J 
millions,  or,  omitting  what  the  Government  returns 
call  the  Other  Capital  Liabilities,  £653!  millions, 
these  figures  of  war  debt  and  war  cost  are  at  first 
sight  somewhat  appalling.  But  there  is  no  reason 
why  they  should  terrify  us,  and  there  are  several 
reasons  why  they  are,  when  looked  at  with  a  dis- 
criminating eye,  much  less  frightening  than  when  we 
first  set  them  out. 

In  the  first  place,  we  have  always  to  remember 
that  these  figures  are  in  after- war  pounds,  and  that 
the  after-war  pound  is,  thanks  to  the  profligate  use 
by  our  war  Governments  of  the  printing-press  and  the 
banking  machine,  just  about  half  the  size,  when 
measured  in  actual  buying  power,  of  the  pre-war 
pound.  Any  one  who  pays  £100  in  taxes  to-day 
thereby  surrenders  claims  to  about  the  same  amount 
of  goods  and  service  as  he  did  if  he  paid  ^50  in  taxes 
before  the  war.  So  that  in  making  any  comparison 


WHILE   IT   HAPPENED  251 

between  the  position  now  and  the  position  then  we 
have  to  divide  the  figures  of  to-day  by  two. 

In  the  second,  we  need  not  be  misled  by  the 
Jeremiahs  who  tell  us  that  now  that  we  have  won 
the  war  we  have  before  us  the  task  of  paying  for  it. 
This  is  not  true,  or  true  only  to  a  small  extent — to 
the  extent,  that  is  to  say,  to  which  we  shall,  when  all 
these  assets  and  liabilities  have  been  settled  up  and 
balanced,  be  afflicted  with  a  foreign  debt.  Let  us 
leave  this  question  on  one  side  for  the  time  being, 
and  consider  what  the  position  really  is  with  regard 
to  that  part  of  the  war's  cost  that  has  been  raised  at 
home.  In  so  far  as  that  has  been  done,  the  war  cost 
has  been  raised  by  us  while  the  war  went  on.  In  fact, 
all  the  war  cost  has  to  be  raised  by  somebody  while 
the  war  goes  on,  because  the  war  is  fought  with  stuff 
and  services  produced  at  the  time  and  paid  for  at 
the  time.  But  when  Americans  lend  us  money  to 
pay  for  some  of  the  stuff  that  they  send  us,  they  pay 
at  the  time  and  we,  or  our  posterity,  have  to  pay 
them  back  later  on ;  this  is  the  only  way  in  which 
we  can  make  posterity  pay  for  the  war,  and  then  it 
only  means  that  our  posterity  pays  America's.  It 
is  not  possible  to  carry  on  war  with  wealth  that  is 
going  to  be  produced  some  day.  The  effort  of  self- 
sacrifice  that  war  demands  has  to  be  made  by  some- 
body during  its  progress — otherwise  the  war  could 
not  be  fought. 

That  effort  of  self-sacrifice  we  have  already  made 
in  so  far  as  we  have  paid  for  our  war  cost  out  of 
money  raised  at  home.  That  money  has  been  raised 
in  three  ways— by  taxation,  by  borrowing  saved 


252  MEETING   THE   WAR   BILL 

money,  and  by  inflation.  When  it  is  raised  by 
taxation  the  sacrifice  is  obvious,  and,  in  nearly  all 
cases,  inevitable :  we  pay  our  larger  war  taxes  and 
so  we  have  less  to  spend  on  ourselves,  and  so  we  go 
without  things.  A  few  people  raise  money  to  pay 
taxes  during  war  by  borrowing  or  drafts  on  capital, 
but  they  are  probably  so  exceptional  that  their  case 
need  not  be  considered.  We  transfer  our  buying 
power  to  the  Government  to  be  used  for  the  fighters, 
and  so  we  set  free  the  labour  and  material  that  used 
to  go  in  providing  us  with  comforts  and  pleasures ; 
our  competition  for  goods  is  reduced,  and  so  the 
Government  is  able  to  get  what  it  needs  out  of  the 
nation's  production,  which  is  pro  tanto  relieved  of 
our  demand.  The  same  thing  happens  when  the 
Government  gets  money  for  the  war  by  borrowing 
money  that  we  save.  We  reduce  expenditure,  and 
transfer  buying  power  to  the  State  and  diminish  our 
demand  on  the  nation's  production,  or  that  of  its 
foreign  supplies.  If  the  whole  war  cost  had  been 
met  by  these  two  methods  there  need  have  been 
little  or  no  increase  in  prices  here,  and  the  cost  of  the 
war  would  have  been  about  half  what  it  has  been. 
Of  the  two  methods,  taxation  is  obviously  the 
cleaner,  simpler  and  more  honest.  By  borrowing, 
the  State  hires  those  who  have  a  margin  to  put  part 
of  it  at  the  disposal  of  the  State  at  a  time  of  national 
crisis,  instead  of  taking  it  from  them  outright.  As 
most  of  the  taxation  involved  by  the  subsequent 
debt  charge  falls  on  those  who  have  a  margin  (as  it 
obviously  should)  the  result  is  that  the  people  who 
subscribed  to  the  loans  are  afterwards  taxed  to  pay 


INJUSTICE   TO   FIGHTERS  253 

themselves  interest  and  to  repay  themselves  their 
debt. 

This  subsequent  taxation  falls  on  them  all  alike 
in  proportion  to  their  ability  to  pay,  or  would  if  the 
income  tax  was  more  equitably  imposed  ;  those  who 
have  subscribed  their  fair  share  to  the  loans  have  an 
offset,  in  the  interest  that  they  receive,  against  the 
taxation ;  those  who  subscribed  less  are  properly 
penalised,  those  who  subscribed  more  are  properly 
benefited.  If  only  the  income  tax  did  not  make  the 
position  of  fathers  of  families  so  unjust,  the  whole 
arrangement  would  look,  at  first  sight,  quite  fair, 
though  rather  absurd  and  clumsy,  involving  all  this 
subscribing  and  taxing  and  paying  back  instead  of  an 
outright  tax  and  having  done  with  it.  But  in  fact 
a  very  grave  inequity  is  involved  by  this  business  of 
borrowing  for  war,  and  laid  upon  just  the  people 
whom  we  ought,  above  all,  to  treat  most  fairly, 
namely,  those  who  fight  for  us.  The  soldiers  and 
sailors  risk  their  lives  for  a  pittance  during  the  war, 
while  their  brothers  and  sisters  and  cousins  and 
uncles  and  aunts,  left  at  home  in  security  and  com- 
fort, earn  bloated  profits  and  wages,  and  put  them, 
or  part  of  them,  into  War  Loans ;  then  when  the 
fighters  come  back,  very  likely  with  their  business 
and  connection  ruined  or  lost,  they  are  expected  to 
contribute  to  the  taxation  that  goes  into  the  pockets 
of  debt-holders. 

Inflation,  the  third  method  of  paying  for  war, 
again  produces  the  same  effect  of  a  reduction  of 
consumption  by  the  civilian  population,  but  in  a 
roundabout  manner,  which  works  at  first  without 


254  MEETING   THE   WAR  BILL 

being  noticed,  and  so  is  particularly  dear  to  the  adroit 
politician.  By  it  nobody  transfers  buying  power  to 
the  Government,  but  the  Government  and  the 
bankers,  who  are  generally  most  reluctant  accessories 
to  the  transaction,  between  them  create  new  buying 
power,  which,  coming  into  a  restricted  market  for 
goods  in  addition  to  all  the  existing  buying  power, 
simply  forces  everybody  to  consume  less  because  the 
money  in  their  pockets  fetches  less  goods  owing  to 
the  rise  in  prices. 

The  evil  attached  to  this  system  is  obvious 
enough.  It  amounts  to  a  tax  on  the  general  con- 
sumer in  proportion  to  his  consumption,  and  so  it 
lays  the  sacrifice  on  the  shoulders  of  those  least  able 
to  bear  it.  No  Government  would  have  the  courage 
to  impose  such  a  tax  openly  and  frankly.  All  the 
warring  Governments  in  varying  degrees  have  used 
this  roundabout  device  of  imposing  it,  very  likely 
being  quite  unaware  of  the  fraud  on  the  consumer 
that  they  were  perpetrating.  Our  own  Government, 
in  fact,  having  first  added  by  this  process  to  a  rise 
in  the  price  of  bread,  then  reduced  it  by  a  special 
subsidy — a  pleasant  touch  of  Alice  in  Wonderland 
finance.  This  mode  of  taxing  by  raising  prices  hits, 
of  course,  all  those  who  live  on  fixed  incomes  and 
salaries  and  wages.  Those  who  can  strike,  or  take 
more  out  of  the  consumer,  can  evade  it,  and  so  it 
falls  on  the  weakest  shoulders  and  incidentally  pro- 
duces friction,  discontent  and  dangerous  suspicion. 
But  even  it  works  at  the  time  when  it  happens. 
Each  creation  of  new  buying  power  gives  the  Govern- 
ment, for  the  moment,  control  of  so  much  in  goods 


OUT   OF   INCOME  255 

and  services  at  the  expense  of  the  consumer ;  but 
when  once  the  new  buying  power  has  been  distributed 
by  the  State's  payments  it  is  in  the  hands  of  the 
nation  as  a  whole.  If  the  process  ceased,  the  nation 
would  still  have  control  of  the  whole  of  its  output, 
which  is  its  income,  though  the  injustice  involved, 
to  those  who  are  not  strong  enough  to  resist  the 
effects  of  higher  prices,  would  continue. 

Thus,  whatever  means — straightforward  or 
devious — are  used  for  financing  war,  it  is  paid  for 
while  it  goes  on  by  the  warring  country  if  the 
financing  is  done  at  home,  or  by  its  foreign  creditors 
if  the  financing  is  done  abroad.  And  it  is,  neces- 
sarily, almost  entirely  paid  for  out  of  income,  that 
is,  out  of  current  production.  It  is  curious  to  find 
that  many  people  still  seem  to  think  that  the  whole 
cost  of  the  war  has  come  out  of  capital.  Luckily 
for  us  it  could  not  be  done,  or  only  to  a  very  small 
extent.  Our  capital  mostly  consisted  of  railways, 
factories,  ships,  roads,  agricultural  land,  machinery, 
houses  and  other  things  that  could  not  be  taken  and 
shot  out  of  a  gun.  These  things  we  have  still  got, 
and  though  many  of  them  are  not  in  such  good  shape 
as  they  were,  some  of  them  are  much  better  equipped 
and  organised.  We  have  drawn  on  our  stocks  of 
materials  and  goods — how  far  it  is  impossible  to 
say ;  we  have  lost  8  J  million  tons  of  shipping  by  war 
losses ;  in  the  meantime  we  have  built,  bought  and 
captured  5|  millions  of  new  tonnage,  and  we  have  a 
claim  against  the  Germans  for  such  tonnage.  On 
capital  account  we  have  suffered  by  wear  and  tear  in 
so  far  as  our  upkeep  has  been  neglected  owing  to  lack 


256  MEETING   THE    WAR  BILL 

of  labour  during  the  war,  and  by  depletion  of 
materials  and  stocks,  and  also,  of  course,  by  the  fact 
that  if  the  war  had  not  happened,  we  should,  if 
pre-war  calculations  were  correct,  have  put  some 
£1700  millions  into  new  investments  at  home  and 
abroad  during  the  4  J  years  of  fighting  and  some  more 
hundreds  of  millions  during  the  after-war  period  of 
Government  borrowing  and  restriction  on  private 
investment.  But  a  very  large  part  of  the  money 
that  went  into  victory  would  otherwise  have  gone 
not  to  capital  account  but  into  the  pleasant  frivolities, 
embellishments  and  vulgarities  that  made  life  an 
amusing  absurdity  in  days  before  the  war. 

If,  then,  the  war  sacrifice  was  made  during  the 
war,  in  so  far  as  its  cost  was  raised  at  home,  how  far 
is  it  true  that  we  are  now  faced  with  the  business  of 
paying  for  it  ?  If  taxation  were  equitable  it  would 
only  be  to  the  extent  that  those  who  ought  to  have 
made  the  sacrifice  and  did  not,  will  in  future  have 
to  pay  interest  to  those  who  did,  or  their  representa- 
tives. So  that  the  first  thing  we  have  to  do  is  to 
make  taxation  equitable,  that  is,  lay  it  on  the  tax- 
payer in  proportion  to  his  ability  to  pay.  There  will 
still  remain  the  injustice  to  those  who  have  fought 
for  us,  which  might  be  cured,  or  amended,  by  special 
exemptions.  With  taxation  on  a  really  sound  basis 
no  further  sacrifice  would  be  involved  by  the  debt 
charge,  and  no  diminution  of  the  nation's  wealth  or 
consuming  power,  which  will  depend,  as  always,  on 
its  output  of  goods  and  services  ;  but  only  a  transfer 
of  consuming  power  from  taxpayers  to  debtholders 
in  accordance  with  the  sacrifice  made  by  the  latter 


OPERATIONS   ABROAD  257 

during  the  war.  What  we  produce  as  a  nation  we 
shall  consume  as  a  nation,  subject  to  the  extent  that 
we  financed  the  war  during  its  course  by  operations 
abroad. 

These  operations  were  twofold.  We  sold  to 
foreigners  part  of  our  holdings  of  foreign  securities, 
thereby  and  to  this  extent  paying  for  war  cost  out  of 
capital — out  of  the  investments  made  by  ourselves 
and  our  forbears  in  America  and  elsewhere.  Mr 
Bonar  Law,  in  a  recent  interview  in  the  Observer, 
stated  that  we  had  sent  back  to  the  United  States 
practically  the  whole  of  our  holdings  of  American 
securities  to  be  sold  or  pledged  as  collateral  for  loans, 
and  that  the  value  of  them  was  three  billion  dollars — 
£600  millions  sterling.  Any  of  them  that  have  only 
been  pledged  can  presumably  be  used  to  meet  the 
loans  raised  as  they  fall  due,  and  so  will  lighten  our 
burden  in  the  matter  of  repayment.  These  loans 
raised  abroad  are  the  second  mode  of  foreign 
financing.  By  it  we  had  raised  up  to  November  Qth 
nearly  £1300  millions,  as  shown  by  the  Economist's 
table,  and  to  that  extent  we  have  pledged  our  future 
production  and  that  of  our  posterity,  to  meet  the 
annual  service  for  interest  and  repayment.  On  the 
other  hand,  all  this  sum  and  more  we  have  (as  shown 
above)  lent  to  our  Allies  and  Dominions,  so  that  the 
ex-Chancellor  was  well  justified  in  his  boast  that  we 
had  only  borrowed  to  finance  our  Allies,  and  that 
we  had  been  self-sufficient  for  our  own  war  cost.* 

In  other  words,  all  that  we  needed  for  the  war  we 
were  able  to  produce  ourselves,  or  to  obtain  in 

*  Budget  Speech.     Parliamentary  Debates,  vol.  105,  No.  33. 


258  MEETING   THE   WAR   BILL 

exchange  for  our  produce  and  assets.  On  paper, 
therefore,  our  position  as  a  creditor  country  is  only 
impaired  by  our  sales  of  securities.  But  that  is 
only  so  on  paper.  In  fact,  the  loans  that  we  have 
raised  abroad  are  good  debts  that  have  to  be  met  to 
the  last  penny,  and  are  a  first  charge  on  our  future 
output,  but  the  advances  that  we  have  made  to  our 
Allies,  much  harder  hit  than  we  are  by  the  war,  are 
assets  on  which  we  cannot  depend.  They  were 
taken  in  our  balance-sheet  above  at  half  their  face 
value,  but  there  is  much  to  be  said  for  writing  them 
off  altogether  and  tearing  up  the  I.O.U.'s  of  our 
foreign  brothers-in-arms.  Their  need  is  greater 
than  ours,  it  would  be  little  satisfaction  to  receive 
interest  and  repayment  from  them,  and  the  payment 
due  from  them,  involving  difficult  problems  of 
taxation  for  them,  would  not  help  the  good  relations 
with  them  which,  we  hope,  may  be  a  lasting  effect 
of  the  war.  And  such  an  act  of  renunciation  on  our 
part  would  do  something  towards  a  restoration  of 
the  spirit  with  which  we  entered  on  war,  a  spirit 
which  has  been  seriously  demoralised  during  its 
course,  largely  owing  to  the  results  of  our  faulty 
finance,  which  encouraged  profiteering  in  all  classes. 
In  any  case,  there  is  our  position.  We  have  a 
big  debt  to  meet  at  home  and  abroad,  and  we  are 
weakened  on  capital  account  by  foreign  indebted- 
ness, wear  and  tear  of  plant  and  dimunition  of  stocks 
and  materials.  Wear  and  tear  and  depletion  we 
can  soon  make  good  if  we  set  to  work  and  work  hard, 
if  our  bureaucracy  takes  away  the  fetters  of  its 
restrictions  and  controls  (instead  of  making  further 


SUGGESTED   FANCY   STROKES       259 

additions  to  the  "  Black  List "  even  after  the 
armistice  !),  and  if  our  ruling  wiseacres  will  refrain 
from  trying  to  stimulate  industry  by  taxing  raw 
and  half-raw  materials.  For  the  debt  charge  many 
pleasant  and  simple  fancy  strokes  are  suggested. 
The  Levy  on  Capital  is  popular,  especially  with  those 
who  do  not  own  any,  but  its  advocacy  is  by  no  means 
confined  to  them.  Mr  Pethick  Lawrence  has 
published  a  persuasive  little  book  about  it,  but  I 
cannot  see  that  he  meets  the  objections  to  it.  These 
are,  the  difficulty  of  valuation,  the  fact  that  in  many 
cases  it  would  have  to  be  paid  by  instalments,  and  so 
would  be  merely  another  form  of  income  tax,  its 
sparing  of  the  waster  and  penalising  of  the  saver, 
and,  consequently,  the  grave  danger  that  it  would 
check  accumulation  and  so  dry  up  the  springs  of 
capital.  Mr  Stilwell  has  produced  a  "  Great  Plan  to 
Pay  for  the  War,"  by  which  all  the  belligerents  and 
neutrals  who  have  been  involved  in  expense  by  the 
war  would  receive  World  Bonds  from  an  Inter- 
national Congress  for  what  they  have  spent  owing  to 
the  war,  and  would  then  pay  one  another  any  inter- 
national debts  by  exchanging  these  World  Bonds, 
and  deal  with  the  home  debt  by  paying  it  off  in  new 
currency  raised  on  the  World  Bonds.  But,  surely, 
to  pay  off  war  debt  with  a  huge  addition  to  currency, 
making  war's  inflation  many  times  worse,  would  be 
a  disastrous  beginning  to  that  new  era  which  is 
alleged  to  be  dawning. 

By  hard  work,  sparing  consumption  of  luxuries, 
and  a  big  industrial  output,  we  can  soon  make  the 
debt  charge  look  smaller  and  smaller  as  compared 


260  MEETING   THE   WAR   BILL 

with  our  aggregate  income.  Our  foreign  debt  we 
can  only  meet  by  shipping  goods  and  rendering 
services.  But  since  it  was  all  raised  to  be  lent  to  our 
Allies  and  our  lending  of  it  was  essential  to  a  victory 
which  has  rid  mankind  .of  a  terrible  menace,  it  is 
surely  reasonable  that  our  creditors  should  not  press 
for  repayment  in  the  first  few  difficult  years,  but 
should  fund  our  short-dated  debts  into  loans  with 
twenty-five  or  thirty  years  to  run.  As  to  the  home 
debt,  we  can  only  lighten  its  burden  on  the  taxpayer 
by  making  taxation  equitable.  To  this  end  reform 
of  the  income  tax  is  an  urgent  need.  We  have  to 
lighten  its  pressure  much  more  effectively  on  those 
who  are  bringing  up  families,  and  by  collecting  it 
through  employers  make  it  an  effective  and  just  tax 
on  those  of  the  working  class  whose  earnings  and 
family  liabilities  make  them  fairly  subject  to  it. 


XVIII 
THE   REGULATION  OF  THE  CURRENCY 

February,  1919 

Macaulay  on  Depreciated  Currency — Its  Evils  To-day — The 
Plight  of  the  Rentier — Mr  Goodenough's  Suggestion— Sir 
Edward  Holden's  Criticisms  of  the  Currency  Committee — 
His  Scheme  of  Reform — Two  Departments  or  One  in  the 
Bank  of  England  ? — Not  a  Vital  Question — The  Ratio  of 
Notes  to  Gold — Objections  to  a  Hard-and-fast  Ratio — The 
Limit  on  Note  Issues — The  Federal  Reserve  Act  and 
American  Optimism — Currency  and  Commercial  Paper — A 
Central  Gold  Reserve  with  Central  Control. 

EVERYONE  has  read,  and  most  of  us  have  forgotten, 
the  great  passage  in  Macaulay's  history  which 
describes  the  evils  of  a  disordered  currency.  "  It 
may  well  be  doubted/'  he  says,  "  whether  all  the 
misery  which  had  been  inflicted  on  the  English 
nation  in  a  quarter  of  a  century  by  bad  Kings,  bad 
Ministers,  bad  Parliaments  and  bad  judges  was  equal 
to  the  misery  caused  in  a  single  year  by  bad  crowns 
and  bad  shillings.  .  .  .  While  the  honour  and  inde- 
pendence of  the  State  were  sold  to  a  foreign  Power, 
while  chartered  rights  were  invaded,  while  funda- 
mental laws  were  violated,  hundreds  of  thousands 
of  quiet,  honest  and  industrious  families  laboured 
and  traded,  ate  their  meals  and  lay  down  to  rest 
in  comfort  and  security.  Whether  Whigs  or  Tories, 
Protestants  or  Jesuits  were  uppermost,  the  grazier 
drove  his  beasts  to  market,  the  grocer  weighed  out 

s 


262     THE  REGULATION  OF  THE  CURRENCY 

his  currants,  the  draper  measured  out  his  broad- 
cloth, the  hum  of  buyers  and  sellers  was  as  loud  as 
ever  in  the  towns,  the  harvest-time  was  celebrated 
as  joyously  as  ever  in  the  hamlets,  the  cream  over- 
flowed the  pails  of  Cheshire,  the  apple  juice  foamed 
in  the  presses  of  Herefordshire,  the  piles  of  crockery 
glowed  in  the  furnaces  of  the  Trent,  and  the 
barrows  of  coal  rolled  fast  along  the  timber  railways 
of  the  Tyne.  But  when  the  great  instrument  of 
exchange  became  thoroughly  deranged,  all  trade, 
all  industry,  were  smitten  as  with  a  palsy.  .  .  . 
Nothing  could  be  purchased  without  a  dispute. 
Over  every  counter  there  was  wrangling  from  morn- 
ing to  night.  The  workman  and  his  employer  had  a 
quarrel  as  regularly  as  the  Saturday  came  round. 
On  a  fair-day  or  a  market-day  the  clamours,  the 
reproaches,  the  taunts,  the  curses,  were  incessant ; 
and  it  was  well  if  no  booth  was  overturned,  and  no 
head  broken.  .  .  .  The  price  of  the  necessaries  of 
life,  of  shoes,  of  ale,  of  oatmeal,  rose  fast.  The 
labourer  found  that  the  bit  of  metal  which,  when 
he  received  it  was  called  a  shilling,  would  hardly, 
when  he  wanted  to  purchase  a  pot  of  beer  or  a  loaf 
of  rye  bread,  go  as  far  as  sixpence." 

From  some  of  the  evils  thus  dazzlingly  described 
we  are  happily  free  in  these  times.  We  are  not 
cursed  with  a  currency  composed  of  coins  which 
are  good,  bad  and  indifferent,  with  the  result  that 
the  public  gets  the  bad  and  indifferent  while  the 
nimble  bullion  dealers  absorb  and  export  the  good. 
There  is  nothing  to  choose  between  one  piece  of 
paper  and  another,  and  all  that  is  wrong  with  them 


PENALISING  FIXED    INCOMES        263 

is  that  there  are  too  many  of  them.  But  the  general 
result  as  it  affects  the  labourer  who  wants  to  purchase 
a  pot  of  beer  or  anyone  else  who  wants  to  buy  any- 
thing is  very  much  the  same.  A  bit  of  metal  that 
is  called  a  shilling  has  about  the  value  of  a  pre- 
war sixpence  and  a  bit  of  paper  that  is  called 
a  Bradbury  fetches  half  as  much  as  the  pound^of 
five  years  ago.  Compared  with  what  other  peoples 
are  suffering  from  the  same  disease  arising  from 
the  same  surfeit  of  money  in  one  form  or  another, 
this  nuisance  that  we  are  enduring  is  not  too  terribly 
severe.  It  has  entailed  great  hardship  on  a  class 
that  is  small  in  number,  namely,  those  who  have  to 
live  on  fixed  incomes.  The  salary-earner  and  the 
rentier  have  borne  the  brunt,  while  the  wage-earner 
and  the  profit-maker  have  been  able  to  expand  their 
earnings,  in  paper,  at  least  to  a  point  at  which  the 
depreciation  of  currency  have  left  them  no  worse 
off.  Seeing  that  the  wage-earners  are  those  who 
do  the  dreariest  and  dirtiest  jobs,  and  that  the 
profit-makers  are  those  who  take  the  risks  of  industry 
and  the  enormous  responsibility  of  organising  enter- 
prise, they  are  the  classes  whom  it  is  clearly  most 
desirable  to  encourage.  The  rentier  in  these  days 
gets  less  than  no  sympathy,  but  we  make  a  great 
mistake  if  we  think  that  we  can  with  impunity 
crush  him  between  the  upper  and  nether  millstone 
of  fixed  income  and  rising  prices.  With  his  help 
we  have  equipped  industry  at  home  and  abroad. 
We  can,  if  we  choose,  by  depreciating  the  currency 
still  further,  lessen  still  more  the  reward  that  we  pay 
him  for  that  benefit.  He  may  kick,  but  he  cannot 


264     THE  REGULATION  OF  THE  CURRENCY 

abolish  the  equipment  with  which  he  has  already 
provided  industry.  But  if  we  make  his  life  too 
hard  he  can  strike  like  the  rest  of  us,  and  by  refusing 
to  provide  for  any  further  expansion  in  industrial 
equipment,  he  can  hold  up  production  until  we  have 
devised  some  new  method  of  laying  up  capital. 
Currency  depreciation  is  good  for  the  debtor  and 
bad  for  the  creditor ;  if  it  goes  too  far  it  kills  the 
creditor  and  reduces  business  to  chaos. 

We  are  a  very  long  way  from  the  chaos  to  which 
many  of  our  Continental  neighbours  have  already 
reduced  their  monetary  systems ;  but  there  is 
fortunately  a  very  general  feeling  that  we  are  a 
country  with  a  reputation  and  a  prestige  on  this 
point ;  and  the  business  world  is  growing  restive 
concerning  the  delay  on  the  part  of  those  responsible 
in  putting  an  end  to  a  state  of  things  which  may  have 
been  justified  by  the  war's  exigencies  (though  there 
is  much  to  be  said  for  the  view  that  in  fact  it  only 
added  to  the  war's  difficulties)  but  is  now  clearly 
as  out  of  date  as  the  censorship,  which,  like  it, 
nevertheless,  continues  to  flourish.  This  state  of 
things  arises  from  the  arrangement  under  which  an 
unlimited  supply  of  legal  tender  currency  can  be 
manufactured  by  the  Government,  which  encouraged 
to  continue  the  system  by  the  fact  that  each  note 
issued  is  in  effect  a  loan  to  itself  without  interest. 
At  the  meeting  of  Barclays  Bank  on  January  27th, 
Mr  Goodenough  demanded  that  the  issue  of  currency 
notes  by  the  Government  should  be  stopped  forth- 
with, and  that  if  it  were  necessary  to  provide  more 
currency  it  would  be  better  for  the  banks  to  be 


A   BANKER'S   SUGGESTION  265 

allowed  to  issue  notes  themselves.  This  suggestion 
involves,  of  course,  a  complete  reversal  of  the  prin- 
ciples on  which  our  monetary  system  has  grown  up, 
since  it  has  long  been  based  on  a  note-issuing 
monopoly  in  the  hands  of  the  Bank  of  England. 
But  these  are  topsy-turvy  days,  in  which  grey- 
headed precedent  is  very  justly  at  a  heavy  discount  ; 
and  Mr  Goodenough's  suggestion  very  practically 
gets  over  a  big  difficulty  that  stands  in  the  way  of 
stopping  the  stream  of  Bradburys.  This  difficulty 
lies  in  the  fact  that  if  the  banks  were  pulled  at  by 
their  customers  for  currency  and  could  not  supply 
them  with  Bradbury  notes,  they  would  be  forced 
to  take  notes  from  the  Bank  of  England,  with  a  bad 
effect  on  the  appearance  of  its  reserve.  If  the 
business  of  issuing  notes  were  put  into  the  hands 
of  the  clearing  banks,  their  power  to  do  so  would 
be  limited  by  the  extent  of  their  assets,  or  of  such 
of  their  assets  as  were  thought  fit  to  rank  as  backing 
for  their  notes.  In  other  words,  the  note-issuing 
business  would  once  more  have  to  be  regulated  on 
banking  principles  and  controlled  by  the  price  asked 
for  advances,  instead  of  expressing  the  helplessness 
and  improvidence  of  an  impecunious  and  invertebrate 
Government.  In  this  manner  the  new  departure 
might  be  a  convenient  halfway-house  on  the  way 
from  chaos  back  to  sanity.  But  probably  it  is  too 
revolutionary  and  goes  too  straight  in  the  teeth  of 
the  Bank  of  England's  privilege  to  receive  much 
practical  consideration ;  and  there  is  the  question 
whether  the  public  would  take  the  new  paper  readily 
and  whether  it  could  be  made  legal  tender. 


266     THE  REGULATION  OF  THE  CURRENCY 

Sir  Edward  Holden,  in  one  of  those  masterly 
surveys  of  world  finance  with  which  he  now  instructs 
the  shareholders  of  the  London  Joint  City  and  Mid- 
land Bank,  assembled  at  their  annual  meeting,  gave 
much  of  his  attention  to  an  attack  on  the  report  of 
Lord  Cunliffe's  Committee  on  Currency.  This  was 
only  to  be  expected,  since  the  Committee  had  made 
recommendations  on  lines  which  were  largely  con- 
servative and  did  not  embody  any  of  the  reforms 
or  changes  which  had  been  previously  advocated  by 
Sir  Edward.  Being  on  this  occasion  chiefly  critical, 
he  did  not  make  very  clear  in  his  latest  speech  the 
precise  proposals  that  he  favours.  For  them  we 
have  to  go  back  to  his  speech  of  a  year  ago,  as  re- 
ported in  the  Economist  of  February  2,  1918, 
p.  171,  where  he  stated  that  "  if  the  Bank  (of 
England)  had  been  working  on  the  same  principles 
as  other  national  banks  of  issue,  there  would  have 
been  little  ground  for  anxiety,"  and  that  these 
principles  are : — 

1.  One   bank    of   issue   and   not    divided   into 
departments. 

2.  Notes  are  created  and  issued  on  the  security 
of  bills  of  exchange  and  on  the  cash  balance,  so  that 
a  relation  is  established  between  the  notes  issued 
and  the  discounts. 

3.  The  notes  issued  are  controlled  by  a  fixed  ratio 
of  gold  to  notes  or  of  the  cash  balance  to  notes. 

4.  This  fixed  ratio  fnay  be  lowered  by  the  pay- 
ment of  a  tax. 

5.  The  notes  should  not  exceed  three  times  the 
gold  or  the  cash  balance. 


THE  CUNLIFFE   RECOMMENDATIONS    267 

As  will  be  remembered,  the  Cunliffe  Committee 
recommended  that  the  division  of  the  Bank  of 
England  into  an  Issue  Department  and  a  Banking 
Department,  should  be  retained;  that  the  old 
principle  by  which  above  a  certain  fixed  limit  all 
notes  should  be  backed  by  gold,  should  also  be 
retained,  but  that  if  at  any  time  a  breach  of  this 
rule  should  be  found  necessary  it  should  be  possible, 
with  the  consent  of  the  Treasury,  and  that  Bank 
rate  "  should  be  raised  to  a  rate  sufficiently  high  to 
secure  the  earliest  possible  retirement  of  the  excess 
issue."  Since  it  was  formerly  only  possible  to 
exceed  the  limit  on  the  fiduciary  issue  by  a  breach 
of  the  law,  under  the  Chancellor  of  the  Exchequer's 
.  promise  to  get  an  indemnity  for  it  from  Parliament, 
and  since  Treasury  tradition  insisted  on  a  10  per 
cent.  Bank  rate  whenever  such  a  breach  was  per- 
mitted or  contemplated,  it  will  be  seen  that  the 
Cunliffe  Committee  proposed  some  considerable 
modifications  in  our  system  and  hardly  justified 
Sir  Edward's  assertion  that  it  "  proposed  that  the 
Bank  should  continue  to  work  under  the  Act  of  1844 
as  heretofore." 

At  first  sight  there  seems  to  be  a  good  deal  of 
difference  between  Sir  Edward's  ideal  and  Lord 
Cunliffe 's,  but  is  not  the  difference  to  a  great  extent 
superficial  ?  Whether  the  Bank  be  divided  into 
two  departments,  each  presenting  a  separate  account, 
or  its  whole  business  be  regarded  as  one  and  stated 
in  one  account,  seems  to  be  rather  a  trifling  question. 
And  the  arguments  put  forward  for  their  several 
views  by  the  two  champions  are  not  strikingly 


268     THE  REGULATION  OF  THE  CURRENCY 

convincing.  Sir  Edward  wants  only  one  account, 
because  he  thinks  the  consequence  would  be  a  stronger 
reserve  and  fewer  changes  in  bank  rate.  But  a 
mere  change  of  bookkeeping  such  as  the  amalgama- 
tion of  the  two  accounts  would  not  make  a  half- 
pennyworth of  difference  to  the  extent  of  the  Bank's 
responsibilities  and  its  ability  to  meet  them,  and  it 
is  on  variations  in  these  factors  that  movements  in 
bank  rate  are  in  most  cases  decided.  On  the  other 
hand,  Lord  Cunliffe  and  his  colleagues  argue  that 
the  main  effect  of  putting  the  two  departments  into 
one  would  be  to  place  deposits  with  the  Bank  of 
England  in  the  same  position  as  regards  converti- 
bility into  gold  as  is  now  held  by  the  note.  On  this 
point  Sir  Edward's  answer  is  telling :  "In  reply  to 
this  statement,  I  say  that  the  depositors  at  the 
present  time  can  always  get  gold  by  drawing  out 
notes  from  the  reserve  and  taking  gold  from  the 
Issue  Department.  There  seems  to  be  little  differ- 
ence between  the  depositors  attacking  gold  direct 
and  attacking  the  gold  through  the  notes  in  the 
reserve.  If  the  Bank  cannot  pay  the  notes  when 
demanded  the  whole  machinery  stops."  Quite  so. 
The  notion  that  the  holder  of  a  Bank  of  England 
note  has  now  a  stronger  hold  over  the  Bank's  gold 
than  the  depositor  seems  to  be  baseless.  He  can 
exercise  his  hold  more  quickly  perhaps,  though  even 
this  is  doubtful.  Since  banknotes  are  not  legal 
tender  at  the  Bank  of  England,  it  is  not  quite  clear 
that  the  depositor  would  even  have  to  take  the 
trouble  to  go  first  to  the  Banking  Department  for 
notes  and  then  to  the  Issue  Department  for  gold. 


THE   BANK    RETURN  269 

He  might  be  able  to  insist  on  gold  in  immediate 
payment  of  his  deposit.     Still  less  convincing  is  the 
Committee's  argument  that  "  the  amalgamation  of 
the  two  departments  would  inevitably  lead  in  the 
end  to  State  control  of  the  creation  of  banking  credit 
generally/'    Their  report  might  have  explained  why 
this  should  be  so,  for  to  the  ordinary  mind  the  chain 
of  consequence  is  not  apparent.     On  the  whole  it 
is  hard  to  see  much  good  or  harm  to  be  achieved 
by  changing  the  form  of  the  Bank  return.     It  might 
make  the  Bank's  position  look  stronger,  but  it  could 
not  make  it  really  stronger.     Nor  would  it  really 
impair  the  strength  of  the  note-holder's  position  as 
against  the  depositor,  because  even  now  there  is  no 
essential  difference.     It  would   substitute  a  more 
businesslike  and  simple  statement  for  a  form  of 
accounts  which  is  cumbrous  and  stupid  and  Early 
Victorian — a  relic  of  an  age  which  produced  the 
crinoline,  the  Crystal  Palace  and  the  Albert  Memorial. 
On  the  other  hand,  to  alter  a  statistical  record  merely 
for  the  sake  of  simplicity  and  symmetry  is  question- 
able.    Unless  we  are  getting  more  and  truer  infor- 
mation, it  is  a  pity  to  make  comparisons  between 
one  year  and  another  difficult  by  changing  the  form 
in  which  figures  are  given. 

A  more  essential  difference  between  the  two 
policies  lies  in  Sir  Edward's  advocacy  of  a  ratio — 
three  to  one — between  notes  and  gold,  and  the  Com- 
mittee's support  of  the  old  fixed  line  system.  By 
the  latter,  if  gold  comes  in,  notes  to  the  same  extent 
can  be  created,  and  if  gold  goes  out  notes  to  the 
amount  of  the  export  have  to  be  cancelled.  Under 


270     THE  REGULATION  OF  THE  CURRENCY 

Sir  Edward's  policy  the  influx  and  efflux  of  gold  would 
have  an  effect  on  the  note  issue  which  would  be  three 
times  the  amount  of  the  gold  that  came  in  or  went 
out.  This  at  least  is  the  logical  effect  of  his  state- 
ment that  "  the  notes  should  not  exceed  three  times 
the  gold  or  the  cash  balance."  This  law  does  not 
seem  to  be  quite  consistent  with  his  view  that  the 
fixed  ratio  of  gold  to  notes  may  be  lowered  by  the 
payment  of  a  tax ;  but  presumably  the  tax  would 
come  into  operation  before  the  three  to  one  part 
was  reached,  and  at  three  to  one  there  would  be  a 
firm  line  drawn.  On  this  assumption  the  Com- 
mittee's argument  is  a  very  strong  one.  "  If,"  says 
its  report  (Cd.  9182,  p.  8),  "  the  actual  note  issue  is 
really  controlled  by  the  proportion,  the  arrangement 
is  liable  to  bring  about  very  violent  disturbances. 
Suppose,  for  example,  that  the  proportion  of  gold 
to  notes  is  actually  fixed  at  one-third  and  is  opera- 
tive. Then,  if  the  withdrawal  of  gold  for  export 
reduces  the  proportion  below  the  prescribed  limit, 
it  is  necessary  to  withdraw  notes  in  the  ratio  of  three 
to  one.  Any  approach  to  the  conditions  under 
which  the  restriction  would  become  actually  opera- 
tive would  then  be  likely  to  cause  even  greater 
apprehension  than  the  limitation  of  the  Act  of 
1844."  Certainly  if,  during  a  foreign  drain,  for 
every  million  of  gold  that  went  out,  another  two 
millions  of  credit,  over  and  above,  had  to  be  can- 
celled, it  is  easy  to  imagine  a  very  jumpy  state  of 
mind  in  Lombard  Street  and  on  the  Stock  Exchange. 
Sir  Edward  and  the  Committee  seem  to  be  agreed 
as  to  a  limit  on  the  note  issue,  but  of  the  two 


SHOULD   THERE   BE   A  LIMIT?      271 

limiting  systems  the  old  one  advocated  by  the  Com- 
mittee, though  apparently  more  severe,  would  seem 
to  have  much  less  alarming  possibilities  behind  it. 

A  point  on  which  the  commercial  world  does  not 
seem  to  have  made  up  its  mind,  however,  is  whether 
there  should  be  a  limit  at  all.  Under  the  old  Act 
there  was  a  limit  which  could  only  be  passed  by  a 
breach  of  the  law.  Under  the  Cunliffe  proposal  the 
limit  could  be  passed  with  the  consent  of  the 
Treasury.  Sir  Edward  has  not  told  us  of  what 
machinery  he  proposes  for  the  passing  of  the  limit 
which  he  lays  down ;  but  in  view  of  the  great 
apprehension  that  an  approach  to  the  limit  point 
would,  as  shown  by  the  Committee,  produce,  it  is 
clear  that  there  would  have  to  be  a  way  round. 
In  Germany  there  is  no  limit ;  you  pay  a  tax  on  the 
excess  issue  and  go  on  merrily.  In  America  it 
would  seem  that  the  German  system  has  been  taken 
for  a  model.  In  his  speech  on  January  2Qth  Sir 
Edward  quoted  Senator  Robert  Owen,  who  was  the 
principal  pioneer  of  the  Federal  Reserve  Bill 
through  the  Senate,  as  follows :-  '  The  central 
idea  of  the  system  is  elastic  currency  issued  against 
commercial  paper  and  gold,  expanding  and  con- 
tracting according  to  the  needs  of  commerce.  .  .  . 
It  is  of  great  importance  that  the  volume  of  these 
notes  should  contract  when  the  commerce  of  the 
country  does  not  require  the  notes  to  be  circulation, 
and  the  reserve  board  can  require  them  to  be 
returned  by  imposing  a  tax  upon  the  issue.  .  .  . 
Under  the  reserve  system  a  financial  panic  is  impos- 
sible. People  will  not  hoard  currency  nor  hoard 


272  THE  REGULATION  OF  THE  CURRENCY 

gold  when  they  know  that  they  can  get  currency 
or  get  gold  when  required.  .  .  .  America  no  longer 
believes  a  financial  panic  possible,  and  therefore  the 
business  men,  being  perfectly  assured  as  to  the 
stability  of  credits,  do  not  hesitate  to  enter  manu- 
facturing and  commercial  enterprises  from  which 
they  would  be  deterred  under  old  conditions  of 
unstable  credit."  Well,  let  us  hope  the  Senator  is 
right  and  that  America  is  right  in  believing  that  a 
financial  panic  is  no  longer  possible  there.  But 
one  cannot  help  feeling  that  such  a  belief  may  be 
rather  dangerous  in  the  minds  of  people  so  ready 
to  take  rose-coloured  views  as  our  American  cousins. 
The  Federal  Reserve  system  has  worked  beautifully 
in  a  period  in  which  American  finance  has  had  nothing 
to  do  but  rake  in  the  enormous  profits  of  American 
production  at  the  expense  of  warring  Europe  and 
lend  part  of  them,  to  be  spent  in  America,  to  the 
Allied  belligerents.  It  may  work  equally  well  if 
and  when  the  problem  to  be  faced  is  different, 
but  it  will  be  interesting  to  see — for  those  of  us  who 
live  to  see — what  sort  of  a  tax  will  be  needed  to 
"  require  "  America,  in  one  of  its  holiday  moods,  to 
return  currency  that  it  thinks  it  needs  and  the 
Federal  Reserve  Board  regards  as  redundant. 

Another  point  on  which  Sir  Edward  lays  great 
stress,  in  his  attack  on  the  Bank  Act  of  1844  and 
the  Committee  which  supports  its  main  principles, 
is  the  beauty  of  the  bill  of  exchange  as  backing  for 
a  note  issue,  as  opposed  to  Government  securities. 
"  There  is,"  he  says,  "  no  automatic  system  for  the 
redemption  of  currency  notes  as  would  be  the  case 


BILLS    AS   BASIS  273 

if  they  were  issued  against  bills  of  exchange,  which 
in  due  course  would  have  to  be  paid  off."  Again, 
"  it  seems  to  me  that  notes  should  not  be  issued 
against  Government  securities  which  may  or  may 
not  be  paid  off,  but  against  bills  of  exchange  which 
must  be  met  at  due  date."  This  advantage  about 
a  bill  of  exchange  is  a  very  real  one  to  the  individual 
holder  who  can  always  put  himself  in  funds  by  letting 
the  contents  of  his  portfolio  "  run  off  "  ;  but  is  there 
much  in  it  as  a  safeguard  against  excessive  issue  of 
currency  in  times  of  exuberance  ?  In  such  times 
bills  that  fall  due  are  pretty  sure  to  be  replaced  by 
new  ones  drawn  against  fresh  production — since 
over-production  is  a  common  symptom  of  com- 
mercial exuberance — or  against  a  resale  of  the  goods 
on  which  the  original  bills  were  based.  As  long  as 
anyone  who  can  show  produce  can  be  certain  to  get 
credit  and  currency,  the  notion  that  the  maturing 
of  bills  of  exchange  can  be  relied  to  restrict  currency 
expansion  within  safe  limits  is  surely  a  dangerous 
assumption.  The  principle  of  a  fixed  limit,  to  be 
broken  in  case  of  real  need,  but  only  after  some 
ceremony  has  been  gone  through  giving  notice  of 
the  fact  that  a  crisis  has  been  reached,  seems  rather 
to  be  required  by  the  psychology  of  speculative 
mankind.  But  even  if  Sir  Edward's  preference  for 
bills  of  exchange  as  backing  for  notes  has  all  the 
merits  that  he  claims  that  is  no  reason  for  urging 
the  repeal  of  the  Bank  Act  to  secure  "their  use. 
Because  the  Bank  Act  does  not  forbid  it :  it  merely 
says,  "  there  shall  be  transferred,  appropriated  and 
set  apart  by  the  said  governor  and  company  to  the 


274  THE  REGULATION  OF  THE  CURRENCY 

Issue  Department  of  the  Bank  of  England  securities 
to  the  value  of/'  etc.  It  is  the  practice  of  the  Bank 
to  put  Government  securities  into  the  Issue  Depart- 
ment, but  the  terms  of  the  Act  do  not  compel  them 
to  do  so,  and  if  an  excess  issue  were  needed  they 
would  seem  to  be  empowered  to  put  any  bills  that 
they  discounted  into  the  assets  held  against  the  note 
issue.  On  the  whole  the  terms  of  the  Act  leaving 
them  freedom  in  the  matter,  except  with  regard  to 
the  "  Government  debt "  of  £11  millions,  which  is 
specially  mentioned  as  to  be  transferred  to  the  Issue 
Department,  seem  to  be  preferable  to  a  special 
stipulation  in  favour  of  bills  of  exchange. 

But  the  most  important  difference  between  Sir 
Edward  Holden  and  the  Cunliffe  Committee  seems 
to  be  in  their  attitude  towards  the  gold  reserve  and 
the  relation  between  the  Bank  of  England  and  the 
rest  of  the  items  that  compose  the  London  money 
market.  The  Committee,  working  to  restore  the 
conditions  which  made  our  market  the  centre  of  the 
world's  finance,  endeavoured  to  give  back  the  control 
of  the  central  gold  reserve  to  the  Bank  of  England 
by  suggesting,  among  other  things,  that  the  other 
banks  should  hand  over  their  gold  to  it.  The}' 
omitted  to  discuss  the  serious  question  of  the  greater 
difficulty  that  the  Bank  is  likely  to  find  in  future  in 
controlling  the  price  of  money  in  the  market,  owing 
to  the  huge  size  that  the  chief  clearing  banks  have 
now  reached.  But  a  central  gold  reserve  under 
central  control  was  evidently  the  object  at  which 
they  aimed.  Sir  Edward  will  have  none  of  this. 
He  says  that  if  this  were  done  the  position  of  the 


THE   JOINT   STOCK  BANKS          275 

Joint  Stock  banks  would  be  weakened,  though  he 
does  not  explain  why,  since  they  would  obviously 
hold  notes  in  place  of  their  gold  and  so  would  be  able 
to  meet  their  customers'  demands,  now  that  the 
latter  are  accustomed  to  the  use  of  notes  for  pocket 
money.  He  points  out  that  "  the  gold  which  was 
held  by  the  Joint  Stock  banks  before  the  war  proved 
most  useful.  ...  At  the  beginning  of  the  war  the 
banks  paid  out  gold,  satisfied  the  demands  of  their 
customers  for  small  currency,  and  thus  eased  the 
situation  until  currency  notes  became  available." 
He  seems  to  have  forgotten  that  the  banks,  or  most 
of  them,  refused  to  part  with  their  gold,  paid  their 
customers  in  Bank  of  England  notes  which,  being 
for  £5  at  the  smallest,  were  of  little  use  for  pocket 
money,  and  so  drove  them  to  the  Bank  to  get  gold  ; 
and  we  had  to  have  a  prolonged  bank  holiday  and 
a  moratorium.  Sir  Edward  is  in  favour  of  three 
gold  reserves,  one  to  be  held  by  the  Government, 
one  by  the  clearing  banks,  and  one  by  the  Bank  of 
England.  If  there  were  differences  between  the  three 
controllers  of  the  reserve  at  a  time  of  crisis  the 
consequence  might  be  disastrous. 

In  view  of  the  admiration  expressed  by  Sir 
Edward  for  the  new  American  system  which  is  so 
clearly  based  on  central  control  it  is  rather  illogical 
that  he  should  be  so  strongly  in  favour  of  independence 
on  this  side  of  the  water.  His  opinion  is  that  "  the 
policy  of  the  Joint  Stock  banks  ought  to  be  to  make 
themselves  independent  of  the  Bank  of  England  by 
.maintaining  large  reserves  in  their  vaults."  Inde- 
pendence and  individualism  are  a  great  source  of 


276  THE  REGULATION  OF  THE  CURRENCY 

strength  in  most  fields  of  financial  activity,  but  in 
view  of  the  great  problems  that  our  money  market 
has  to  face  there  seems  to  be  much  to  be  said  for 
co-operation  and  central  control,  at  least  until  we 
have  got  back  to  a  normal  state  of  affairs  with 
regard  to  the  foreign  exchanges. 


XIX 

TIGHTENING   THE   FETTERS   OF   FINANCE 
March,  1919 

The  New  Meaning  of  Licence — The  Question  of  Capital  Issues — 
Text  of  the  Treasury  Regulations — Their  Scope  and  Effect 
— The  Position  of  the  Stock  Exchange — Wider  Issues  at 
Stake — Should  Capital  be  set  Free  ?— The  Arguments  for 
and  against — Perils  of  an  Excessive  Caution — Ihe  New 
Committee  and  its  Terms  of  Reference — The  Absurdity  of 
prohibiting  Share-splitting — The  Storm  in  the  House  of 
Commons — Disappearance  of  the  Retrospective  Clause — A 
Sample  of  Bureaucratic  Stupidity. 

A  CONTRAST  between  liberty  and  licence  is  a  pleasant 
alliterative  commonplace  beloved  by  political  writers, 
especially  those  with  a  reactionary  bias.  In  the 
light  of  recent  events  it  seems  to  be  going  to  take  a 
new  meaning.  Licence  will  soon  be  understood, 
not  as  the  abuse  of  liberty,  to  which  democracies 
are  prone,  but  as  a  new  weapon  by  which  our 
bureaucracy  will  do  away  with  liberty  by  tightening 
the  shackles  on  our  economic  and  other  activities. 
For  imports  and  exports  the  licence  system  is  already 
familiar ;  if  the  mines  and  railways  are  to  be  nation- 
alised we  may  have  to  be  licensed  before  we  can 
burn  coal  or  go  away  for  a  week-end  ;  if  the  Eugenists 
have  their  way  a  licence  will  be  necessary  before  we 
can  propagate  the  species ;  and  before  we  can  get 
a  licence  to  do  anything  we  shall  have  to  go  through 

T 


278    TIGHTENING   FETTERS   OF   FINANCE 

an  exasperating  process  of  filling  in  forms  innumer- 
able, inconsistent,  overlapping  and  incomprehensible. 
Finance  is  the  latest  victim  of  this  melancholy 
tendency.  Under  the  guise  of  an  attempt  to  give 
greater  freedom  to  it  a  system  has  been  introduced 
which  makes  a  Treasury  licence  necessary,  with 
penalties  under  the  Defence  of  the  Realm  Act,  for 
doing  many  things  which  have  hitherto  been  possible 
for  those  who  were  prepared  to  forgo  the  privilege 
of  a  Stock  Exchange  quotation.  Let  the  story  be 
told  in  official  language,  as  uttered  through  the 
Press  Bureau,  on  February  24th,  in  "  Serial  No.  C. 
10917." 

"  In  view  of  the  changed  conditions  resulting 
from  the  conclusion  of  the  armistice,  the  Treasury 
has  had  under  consideration  the  arrangements  which 
have  been  in  force  during  the  war  for  the  control  of 
New  Issues  of  Capital. 

"  The  work  of  scrutinising  proposals  for  new 
Capital  Issues  has  been  performed  during  the  war 
by  the  Capital  Issues  Committee,  the  object  being 
to  refuse  sanction  for  all  projects  not  immediately 
connected  with  the  successful  prosecution  of  the 
war.  The  decisions  of  the  Treasury,  taken  upon 
the  advice  of  this  Committee,  have,  however,  not 
had  any  binding  force,  beyond  what  is  derived  from 
the  emergency  regulations  of  the  Stock  Exchange, 
which  forbids  f dealings  in  any  new  Issues  which 
have  not  received  Treasury  consent. 

"  While  it  is  not  possible  under  existing  financial 
conditions  to  dispense  altogether  with  the  control 
of  Capital  Issues,  it  has  clearly  become  necessary 


D.O.R.A.  279 

to  reconsider  the  principles  upon  which  sanction 
has  been  given  or  refused  in  order  that  no  avoidable 
obstacles  may  be  placed  in  the  way  of  providing  the 
Capital  necessary  for  the  speedy  restoration  of 
Commerce  and  Industry,  and  the  development  of 
public  utility  services. 

"  In  view  of  the  numbers  of  the  proposals  for 
fresh  Issues  of  Capital  which  are  to  be  expected,  it 
is  necessary  to  provide  further  machinery  for  dealing 
with  them  and  for  making  the  decisions  upon  them 
effective. 

"  A  regulation  under  the  Defence  of  the  Realm 
Act  has  accordingly  been  made  prohibiting  all  Capital 
Issues  except  under  licence  from  the  Treasury,  and 
the  Capital  Issues  Committee  has  been  reconstituted 
with  new  Terms  of  Reference,  which  are  as  follows  : — 
'  To  consider  and  advise  upon  applications 
received  by  the  Treasury  for  licences  under  Defence 
of  the  Regulation  (30  F)  for  fresh  Issues  of  Capital, 
with  a  view  to  preserving  Capital  during  the  recon- 
struction period  for  essential  undertakings  in  the 
United  Kingdom,  and  to  preventing  any  avoidable 
drain  upon  Foreign  Exchanges  by  the  export  of 
Capital,  except  where  it  is  shown  to  the  satisfaction 
of  the  Treasury  that  special  circumstances  exist/ 

"  It  will  be  an  instruction  to  the  Committee  that, 
in  order  that  applications  may  be  dealt  with  expe- 
ditiously  and  to  enable  oral  evidence  to  be  given  in 
support  of  them  when  desired  by  the  applicant, 
that  the  Committee  should  sit  by  Panels  consisting 
of  three  members,  the  decision  of  the  Panels  to  be 
subject  to  confirmation  by  the  full  Committee, 


280    TIGHTENING   FETTERS   OF   FINANCE 

"  All  applications  for  licences  must  be  made,  in 
the  first  instance,  in  writing  on  a  Form  which  can 
be  obtained  from  the  Secretary  of  the  Capital  Issues 
Committee,  Treasury,  S.W.  i. 

"  Before  any  application  is  refused  the  Committee 
will  give  the  applicant  an  opportunity  of  giving  oral 
evidence  in  support  of  his  case." 

The  notice  then  proceeded  to  recite  the  terms  of 
D.O.R.A.  30  F,  of  which  more  anon.  Next  day 
came  a  supplementary  announcement,  "  Serial  No. 
C  10938,"  as  follows  : — 

"  With  reference  to  the  recent  announcement  in 
the  Press  that  all  applications  for  Treasury  licences 
must  be  made  in  writing  on  a  form  obtainable 
from  the  Secretary  of  the  Capital  Issues  Committee, 
Treasury,  S.W.  i,  delay  will  be  avoided  if  intending 
applicants  will  state  which  of  the  following  forms 
they  require : — 
Form  No.  i.  Issue  by  a  proposed  New  Company  to 

start  a  fresh  business. 
Form  No.  2.     Issue  by  an  Existing  Company  (other 

than  for  the  purpose  of  capitalising 

profits). 
Form  No.  3.     Issue  by  an  Existing  Company  for  the 

purpose  of  capitalising  profits. 
Form  No.  4.     Conversion  of  a  Firm  into  a  Limited 

Company  which  does  Not  involve 

the  introduction  of  fresh  capital. 
Form  No.  5.     Conversion  of  a  Firm  into  a  Limited 

Company  which  Does  involve  the 

introduction  of  fresh  capital. 
If  none  of  the  above  Forms  appears  to  be  applicable 


FILLING  IN    FORMS  281 

(as,  e.g.,  in  amalgamations,  sub-divisions  of  shares, 
etc.),  a  statement  of  the  facts  should  be  submitted 
in  writing." 

Before  we  go  on  to  consider  the  new  regulation, 
30  F,  let  us  try  to  see  what  is  the  real  effect  of  the 
document  above  quoted.     It  was  evidently  intended 
to  be  a  relaxation  of  the  control  of  finance.     This  is 
shown  by  the  sentence  which  says  that  the  matter 
was  to  be  reconsidered  "  in  order  that  no  avoidable 
obstacle  may  be  placed  in  the  way  of  providing  the 
capital    necessary    for    the    speedy   restoration    of 
commerce  and  industry,  and  the  development  of 
public  utility  services."    And  yet  it  was  thought 
necessary  to  give  legal  force  and  attach  penalties 
to  regulations  that  have  worked  during  the  war 
quite  sufficiently  well  to  secure  a  much  stricter 
control  than  is  now  required.     The  explanation  of 
this  apparent  inconsistency  is  probably  to  be  found 
in  the  desire  of  the  Government  to  meet  a  grievance 
of  the  Stock  Exchange.     Hitherto  the  only  penalty 
that  befell  those  who  made  a  new  issue  without 
getting  Treasury  sanction  was  that  the  securities 
issued  could  not  be  dealt  in  on  the  Stock  Exchange. 
The  practical  effect  of  this  was  that  those  who  acted 
without  Treasury  sanction  could  only  issue  securities 
subject  to  this  serious  drawback,  and  so  an  effective 
but  not  altogether  prohibitive  bar  was  put  on  the 
process.     If  this  bar  was  not  strong  enough  in  war- 
time it  ought  clearly  to  have  been  strengthened 
long  ago  ;  if  it  was  strong  enough,  then  why  should 
it  be  strengthened  now  ? 

From  the  Stock  Exchange  point  of  view  it  is  easy 


282    TIGHTENING   FETTERS   OF   FINANCE 

to  make  out  a  good  case  for  working  through  licence 
and  penalty  rather  than  through  the  banning,  of 
the  securities  effected,  from  sanction  for  dealings. 
By  thus  being  used  as  an  official  weapon  the  Stock 
Exchange  penalised  itself  and  its  members.  By 
saying  "  no  security  not  sanctioned  by  the  Treasury 
shall  be  dealt  in  here,"  its  Committee  restricted 
business  in  the  House  and  drove.it  outside.  This 
grievance  was  obvious  and  was  plentifully  com- 
mented on  during  the  war.  If  the  Committee  had 
pressed  the  point  vigorously  it  could  probably  have 
forced  the  Government  long  ago  to  abolish  the 
grievance  by  making  all  dealings  in  new  issues  that 
appeared  without  Treasury  sanction  illegal  and  liable 
to  penalty.  A  patriotic  readiness  to  fall  in  with  the 
Government's  desires  was  probably  the  reason  why 
the  Stock  Exchange  refrained  from  embarrassing 
it,  during  the  war,  by  too  active  protests  against  a 
grievance  that  was  then  more  or  less  real ;  though 
it  should  be  noted  that  even  if  the  grievance  had 
been  amended,  the  Stock  Exchange  would  not 
necessarily  have  got  any  more  business,  but  would 
only  have  succeeded  in  stopping  a  very  moderate 
amount  of  business  that  was  being  done  by  out- 
siders. But  when  all  is  said  that  can  be  said  for  the 
justice  of  the  case  that  can  be  made  by  the  Stock 
Exchange,  the  question  still  arises  whether  it  was 
advisable,  at  a  time  when  relaxation  of  restrictions 
was  desirable  in  the  interests  of  the  revival  of 
industry,  to  draw  tighter  bonds  which  had  been 
found  tight  enough  to  do  their  work.  That  the 
Stock  Exchange  should  suffer  from  limitations  from 


EXPANDING   BUSINESS  283 

which  outside  dealers  were  exempt  was  certainly 
a  hardship.  On  the  other  hand,  since  the  armistice 
there  has  been  a  considerable  expansion  in  Stock 
Exchange  business.  Oil  shares,  Mexican  securities, 
industrial  shares,  insurance  shares,  and  others  in 
which  capitalisation  of  reserves  and  bonus  issues 
have  been  used  as  an  effective  lever  for  speculation, 
have  enjoyed  spells  of  considerable  activity.  With 
this  revival  in  progress,  in  spite  of  many  obvious 
bear  points,  such  as  industrial  unrest  at  home, 
Bolshevism  abroad,  the  continuance  of  heavy  ex- 
penditure by  the  Government,  and  the  hardly  slack- 
ened growth  of  the  national  debt,  it  seems  to  have 
been  scarcely  necessary  in  the  interests  of  the  House 
to  have  made  regulations  which,  though  perhaps 
demanded  by  abstract  justice,  imposed  new  ties  on 
enterprise  at  a  time  when  complete  freedom,  as  far 
as  it  was  consistent  with  the  best  interests  of  the 
country,  was  most  of  all  desirable. 

How  far,  we  have  next  to  ask,  is  it  necessary  for 
the  best  interests  of  the  country  to  restrict  the 
freedom  of  capital  issues  ?  If  we  look  back  at  the 
terms  of  reference  under  which  the  reconstituted 
Committee  is  to  work,  we  see  that  the  officially 
expressed  objects  are  (i)  preserving  capital  for 
essential  undertakings  in  the  United  Kingdom, 
and  (2)  preventing  any  avoidable  drain  upon  Foreign 
Exchanges  by  the  export  of  capital.  There  is  cer- 
tainly much  to  be  said  for  both  these  objects.  When 
we  lend  money  to  foreigners  we  give  them  the  right 
to  draw  on  us  now  in  return  for  their  promises  to 
pay  some  day ;  in  other  words,  we  make  an  invisible 


284    TIGHTENING   FETTERS    OF   FINANCE 

import  of  foreign  securities,  and  in  the  present  state 
of  our  trade  balance  all  imports,  whether  visible  or 
invisible,  need  careful  watching.  It  is  also  very 
evident  that  at  a  time  when  capital  is  scarce  there 
is  much  to  be  said  for  keeping  it  for  essential  in- 
dustries, especially  those  which  produce  necessaries 
and  goods  for  export,  and  not  allowing  it  to  be  swept 
up  by  borrowers  who  are  going  to  devote  it  to  making 
expensive  fripperies  on  which  big  profits  are  probable. 
There  remains  a  very  big  other  side  to  both  these 
questions.  All  over  the  world  there  is  a  demand 
for  goods  which  have  not  been  produced,  or  only 
in  greatly  reduced  quantities,  during  the  war. 
This  demand  is  only  effective  in  so  far  as  willing 
buyers  can  pay ;  some  of  them  have  the  needful 
cash  in  hand  or  waiting  in  London  or  elsewhere 
to  be  drawn  on,  but  a  great  number  of  would-be 
buyers  want  to  be  financed,  and  will  have  to  be 
financed  by  somebody  if  the  needs  that  they  feel 
are  to  be  translated  into  actual  purchases.  In 
other  words,  in  order  that  the  wheels  of  industry 
are  to  be  set  turning  as  fast  as  they  might,  if  they 
had  a  full  chance,  somebody  has  to  lend  freely. 
Now,  it  is  surely  most  of  all  important  in  the  national 
interest  that  those  wheels  should  begin  spinning  as 
fast  as  possible,  and  the  question  is  whether  we  are 
more  likely  to  serve  that  interest  best  by  keeping 
a  meticulous  eye  on  the  course  of  exchange  and 
buttoning  up  our  pockets  to  foreign  borrowers  or 
by  leaving  capital  free  to  seek  its  market,  knowing 
that  every  time  we  give  the  foreigner  the  right  to 
draw  on  us  we  stimulate  our  export  trade,  because 


BARRY   LYNDON'S   GOLD    PIECE     285 

his  drawing  must  finally  mean  a  demand  on  us  for 
something — goods,  securities  or  gold — and  goods  are 
what  people  are  in  these  times  most  anxious  to  take. 
If  we  are  going  to  leave  all  the  financing  to  be  done 
by  America  and  fear  to  import  promises  to  pay  lest 
they  should  be  followed  by  demands  on  our  gold, 
shall  we  not  be  rather  in  the  position  of  Barry 
Lyndon,  who  was  given  a  gold  piece  by  his  mother 
when  he  went  out  into  the  world,  with  strict  in- 
junctions always  to  keep  it  in  his  pocket  and  never 
to  change  it  ?  Regard  for  our  gold  standard  is 
most  necessary,  but  the  gold  standard  is  not  an 
end  in  itself,  but  merely  an  important  part  of  a 
machine  which  only  exists  to  serve  our  industry. 
If  we  are  so  careful  of  the  machine,  which  is  a 
mere  subsidiary,  that  we  check  the  industry  which 
it  is  there  to  serve,  we  shall  be  like  the  dandy  who 
got  wet  through  because  he  had  not  the  heart  to 
unfurl  his  beautifully  rolled-up  umbrella. 

Again,  it  looks  very  sound  and  sensible  to  keep 
capital  for  purposes  that  are  essential,  but,  on  the 
other  hand,  it  is  so  enormously  important  to  set 
industry  going  as  fast  as  possible  that  almost  any 
one  who  will  do  anything  in  that  direction  is  entitled 
to  be  given  a  chance.  In  war-time,  when  labour 
and  materials  were  so  scarce  that  they  could  not 
turn  out  all  the  munitions  that  were  necessary,  such 
a  restriction  was  clearly  inevitable.  Now,  when 
labour  and  materials  are  becoming  more  plentiful, 
and  the  scarce  commodity  is  the  pluck  and  enter- 
prise that  will  take  the  risks  involved  by  getting 
to  work  on  a  peace  basis,  it  may  be  argued  that 


286    TIGHTENING   FETTERS    OF   FINANCE 

any  one  who  will  take  those  risks,  whatever  be  the 
stuff  or  services  that  he  proposes  to  produce,  should 
be  encouraged  rather  than  checked.  It  is  again  a 
question  of  the  balance  of  advantage.  If  we  are 
going  to  be  so  careful  in  seeing  that  capital  is  not 
put  to  a  wrong  use  that  we  take  all  the  heart  out  of 
those  who  want  to  make  use  of  it,  we  shall  do  more 
harm  than  good.  If  by  leaving  capital  free  to  go 
into  any  enterprise  that  it  fancies  we  can  give  a 
start  to  industry  and  promote  a  spirit  of  courage 
and  enterprise  among  its  captains,  it  will  be  well 
worth  while  to  do  so  at  the  expense  of  seeing  a  certain 
amount  of  capital  going  into  the  production  of 
articles  that  the  community  might,  if  it  made  a 
more  reasonable  use  of  its  purchasing  power,  very 
well  do  without.  The  same  question  arises  when 
we  consider  the  desire  of  the  Government,  not  ex- 
pressed in  the  above  statement,  but  very  freely 
admitted  by  Mr  Bonar  Law,  in  discussing  it  in  the 
House  of  Commons,  to  keep  capital  to  be  lent  to 
it  rather  than  expended  in,  perhaps  unnecessary, 
industry.  Here,  again,  it  is  clearly  in  the  interest 
of  the  taxpayer  that  Government  loans  should  be 
raised  on  the  most  favourable  terms  possible.  But 
if,  in  order  to  do  so,  we  starve  industry  of  capital 
that  it  needs,  and  so  check  the  production  on  which 
all  of  us,  Government  and  citizens  alike,  ultimately 
have  to  live,  we  shall  be  scoring  an  immediate 
advantage  at  the  expense  of  future  progress — 
spoiling  a  possibly  brilliant  break  by  putting  down 
the  white  ball  for  a  couple  of  points. 

There  is  thus  a  good  deal  to  be  said  for  setting 


AN   EXASPERATING  COMMITTEE     287 

capital  free,  before  we  have  even  arrived  at  the 
most  serious  objection  to  regulating  it  under  Treasury 
licence.  This  objection  is  the  exasperation,  delay 
and  uncertainty  inyolved  by  this  control.  Even  if 
we  had  an  ideally  wise  and  expeditious  body  to  decide 
about  capital  issues  it  might  not  be  the  best  thing 
to  set  it  to  work.  But  when  we  remember  that  in 
order  to  see  that  the  wrong  sort  of  issue  is  not 
made,  all  issues  will  have  to  pass  through  the 
terribly  slow-working  process  of  official  selection 
before  the  necessary  licence  is  finally  granted,  it 
begins  to  look  still  more  likely  that  we  should  do 
well  to  run  the  risk  of  letting  a  few  goats  through 
the  gate,  rather  than  keep  all  the  sheep  waiting 
outside  for  months,  with  the  probable  result  that 
many  of  them  may  lose  altogether  their  chance  of 
final  salvation.  It  will  be  noted  from  the  official 
statement  that  the  arbitrary  methods  of  the  old 
Committee  are  to  be  modified.  It  has  long  been  a 
by- word  among  those  who  had  dealings  with  it ; 
they  abused  it  in  quite  sulphurous  language  and  were 
wont  to  quote  it  as  an  example  of  all  that  bureau- 
cratic tyranny  is  and  should  not  be,  thereby  doing 
some  injustice  to  our  bureaucrats,  seeing  that  the 
Committee  was  manned  not  by  officials  but  by 
business  men,  clothed  pro  hac  vice  in  the  thunder 
of  Whitehall.  The  new  Committee  is  to  sit  by 
panels  of  three,  so  as  to  expedite  matters,  and  so 
as  to  allow  applicants  the  privilege  of  giving  oral 
evidence.  This  is  an  innovation  that  will  save 
some  exasperation,  but  it  will  hardly  accelerate 
matters,  especially  as  the  decision  of  the  panels  will 


288    TIGHTENING   FETTERS    OF    FINANCE 

be  subject  to  confirmation  by  the  full  Committee, 
so  that  all  the  work  will  have  to  be  done  twice  over. 
There  is  thus  much  reason  to  fear  that  delay,  so 
fatal  in  business  matters,  will  be  an  inevitable  off- 
spring of  the  efforts  of  the  new  Committee,  and  the 
list  of  different  forms  on  which  applications  are  to 
be  made,  given  above,  shows  that  all  the  parapher- 
nalia of  red  tape  will  dominate  the  proceedings. 

Now  for  the  terms  of  the  new  Regulation  under 
the  Defence  of  the  Realm  Act. 

"i.  The  following  regulation  shall  be  inserted 
after  Regulation  30  EE  : — 

"30   F.     The   following   provisions   shall   have 
effect  in  respect  of  new  capital  issues  and  to  dealings 
in  securities  issued  for  the  purpose  of  raising  capital  : 
"  (i)  No  person  shall,  except  under  and  in  pur- 
suance of  a  licence  granted  by  the  Treasury — 

"  (a)  issue,  whether  for  cash  or  otherwise,  any 

stock,  shares  or  securities  ;   or 
"  (6)  pay  or  receive  any  money  on  loan  on  the 
terms  express  or  implied  that  the  money 
is  to  be  or  may  be  applied  at  some  future 
date  in  payment  of  any  stock,  shares  or 
securities  to  be  issued  at  whatever  date 
to  the  person  making  the  loan  ;  or 
"  (c)  sub-divide  any  shares  or  Debentures  into 
shares  or  Debentures  of  a  smaller  de- 
nomination, or  consolidate  any  shares  or 
Debentures  of  a  larger  denomination  ;  or 
"  (d)  renew  or  extend  the  period  of  maturity  of 

any  securities ;  or 
"  (e)  purchase,    sell   or   otherwise   transfer   any 


D.O.R.A.  289 

stock,  shares  or  securities  or  any  interest 
therein,  or  the  benefit  of  any  agreement 
conferring  a  right  to  receive  any  stock, 
shares  or  securities,  if  the  stock,  shares 
or  securities  were  issued,  sub-divided  or 
consolidated,  or  renewed  or  the  period 
of  maturity  thereof  extended,  or  the 
agreement  was  made,  as  the  case  may  be, 
at  any  time  between  the  i8th  day  of 
January,  1915,  and  the  24th  day  of 
February,  1919,  and  the  permission  of 
the  Treasury  was  not  obtained  to  the 
issue,  sub-division,  consolidation,  renewal 
or  extension  or  the  making  of  the  agree- 
ment, as  the  case  may  be. 

"  (2)  No  person  shall  except  under  and  in  pur- 
suance of  a  licence  granted  by  the  Treasury — 

"  (a)  buy   or   sell   any   stock,    shares   or   other 
securities  except  for  cash  or  when  the 
purchase    or   sale    takes   place   in   any 
recognised  Stock  Exchange,  subject  to 
the  rules  or  regulations  of  such  exchange. 
"  (b)  buy   or   sell   any   stock,    shares   or  other 
securities  which  have  not  remained  in 
physical  possession  in  the  United  King- 
dom since  the  3oth  September,  1914. 
"  (3)  A  licence  granted  under  this  regulation  may 
be  granted  subject  to  any  terms  and  conditions 
specified  therein. 

".  (4)  If  any  person  acts  in  contravention  of  this 
regulation,  or  if  any  person  to  whom  a  licence  has 
been  granted  under  this  regulation  subject  to  any 


290    TIGHTENING    FETTERS    OF   FINANCE 

terms  or  conditions  fails  to  comply  with  these  terms 
or  conditions,  he  shall  be  guilty  of  a  summary  offence 
against  these  regulations. 

"  (5)  In  this  regulation  the  expression  '  securities ' 
includes  Bonds,  Debentures,  Debenture  stock,  and 
marketable  securities. ' ' 

It  will  be  seen  at  once  that  the  terms  of  this 
document,  on  any  interpretation  of  them,  go  far 
beyond  the  intentions  expressed  in  what  may  be 
called  the  official  preamble  and  in  the  new  Com- 
mittee's terms  of  reference.  One  of  the  clauses 
seems,  with  all  deference  to  its  august  composers, 
to  be  merely  silly.  This  is  (i)  (c)  forbidding  sub- 
division of  securities.  If  a  £10  share  is  split  into 
ten  £i  shares  this  operation  cannot  make  the  smallest 
difference  to  the  supply  of  capital  for  essential  in- 
dustries or  cause  any  drain  on  the  Foreign  Exchanges. 
I  am  assured  by  those  who  have  delved  into  the 
official  intention  that  the  reason  for  the  objection 
of  the  old  Committee  to  splitting  schemes,  on  which 
this  new  prohibition  is  based,  was  that  splitting 
made  shares  more  marketable  and  popular  and  so 
more  likely  to  compete  with  War  Bonds.  But  a 
mere  sale  of  shares,  split  small  and  so  popularised, 
does  not  absorb  any  capital.  That  only  happens 
when  money  is  put  into  some  new  form  of  industry. 
If  A,  who  holds  ten  £20  shares,  is  enabled  to  dispose 
of  them  to  B  because  they  are  split  into  200  £1 
shares,  then  A  instead  of  B  has  got  the  money  and  has 
to  invest  it  in  something.  The  amount  of  capital 
available  for  investment  is  not  diminished  by  a 
halfpenny.  This  regulation  is  just  a  piece  of 


A    STORM    PRODUCED  291 

short-sighted    tyranny  which    exasperates  without 
doing  the  smallest  good  to  anybody. 

More  serious,  however,  was  clause  (i)  (e),  under 
which  any  securities  that  have  been  issued,  split, 
consolidated  or  renewed  without  Treasury  sanction 
since  January,  1915,  were  not  to  be  dealt  in,  in  future, 
without  a  licence.  The  result  of  this  clause,  if  it 
had  stood,  would  have  been  that  all  loans  under 
which  such  securities  had  been  pledged  would  have 
had  to  be  called  in  because  the  collateral  became 
unsaleable,  except  after  all  the  ceremonies  had  been 
gone  through  and  a  licence  had  been  got.  It  was 
also  possible  to  argue  that  the  prohibition  to  renew 
or  extend  the  maturity  of  any  security  meant  that 
no  loans  of  any  kind  could  be  renewed,  and  that  no 
commercial  bills  could  be  renewed,  without  a  licence. 
It  is  true  that  No.  5  paragraph  says  what  the  ex- 
pression "  securities  "  includes,  but  it  does  not  state 
definitely  that  bonds,  Debentures,  Debenture  stock 
and  marketable  securities  are  the  only  things  in- 
cluded. It  was  a  pretty  piece  of  drafting,  and 
raised  a  pretty  storm  in  the  House  of  Commons  on 
February  27th,  when  a  somewhat  lurid  picture  of 
its  effects  was  drawn  by  Sir  H.  Dalziel  and  Mr 
Macquisten.  Mr  Chamberlain  not  being  then  legally 
a  member  of  the  House,  it  fell  to  the  lot  of  Mr  Bonar 
Law  to  explain  that  the  Government  had  really 
meant  to  give  greater  freedom  in  making  new  issues, 
that  the  evils  anticipated  had  not  been  intended, 
that  he  hoped  the  House  would  not  judge  the 
Government  too  harshly  for  not  making  unsanctioned 
issues  illegal  from  the  beginning,  and  that  a  new 


292    TIGHTENING  FETTERS    OF   FINANCE 

Order  would  be  issued  removing  the  retrospective 
effect  of  the  new  regulation.  And  so  amendment 
was  promised  of  a  measure  which  would  have  had 
very  awkward  and  unjust  effects.  It  may  be  argued 
that  it  would  only  have  affected  people  who  had 
done,  during  the  war,  what  they  were  asked  not  to 
do,  namely,  make  issues  without  Treasury  sanction. 
If  the  old  Committee  had  been  a  reasonable  and 
expeditious  body  this  argument  would  have  had 
great  weight.  But,  in  view  of  its  caprices  and 
dilatoriness,  there  was  a  good  deal  of  excuse  for 
those  who  decided  to  do  without  Treasury  sanction 
and  take  the  consequence  of  being  unable  to  market 
their  securities  on  the  Stock  Exchange.  To  propose 
to  add  a  new  penalty  and  cause  the  cancelling  of  all 
the  financial  arrangements  made  in  connexion  with 
such  issues  during  four  years  was  simply  piling 
blunder  on  blunder.  Luckily,  the  protests  of  the 
Government's  own  supporters  sufficed  to  undo  the 
worst  of  the  mischief ;  but  the  whole  affair  is  only 
another  argument  in  favour  of  the  earliest  possible 
ridding  of  finance  and  industry  from  control  that  is 
so  clumsily  exercised. 


XX 

*  MONEY  OR  GOODS? 

December,  1918 

"  Boundless  Wealth  " — Money  and  the  Volume  of  Trade — The 
Quantity  Theory— The  Gold  Standard— How  is  the  Volume 
of  Paper  to  be  regulated  ? — Mr  Kitson's  Ideal. 

IN  the  November  Trade  Supplement  an  endeavour 
was  made  to  answer  Mr  Kitson's  rather  vague  and 
general  insinuations  and  charges  against  our  bankers 
concerning  the  manner  in  which  they  do  their 
business.  Now  let  us  examine  the  larger  and  more 
interesting  problem  raised  by  his  criticism  of  our 
currency  system. 

In  his  article  in  the  June  Supplement  he  told  us 
that  "  if  the  British  public  had  any  grasp  of  the 
fundamental  truths  of  economic  science  they  would 
know  that  a  future  of  boundless  wealth  and  prosperity 
is  theirs."  This  is  a  cheery  and  encouraging  view 
and,  let  us  hope,  a  true  one.  But,  that  boundless 
wealth  can  only  be  got  if  we  work  for  it  in  the  right 
way.  Can  Mr  Kitson  show  it  to  us,  and  what  are 
these  "  fundamental  truths  of  economic  science  "  ? 
It  is  easier  to  talk  about  them  than  to  find  any  two 

*  This  was  the  latter  of  two  articles  contributed  to  the 
Times  Trade  Supplement  in  answer  to  a  series  in  which  Mr 
Arthur  Kitson  had  attacked  our  banking  and  currency  system 
and  suggested  an  inconvertible  paper  currency. 

U 


294  MONEY   OR   GOODS? 

economists  who  would  give  an  exactly — or  even 
nearly — similar  list  of  them.  Mr  Kitson  glances 
"  at  a  few  elementary  truths."  "  Wealth/'  he  says, 
"  is  the  product  of  two  prime  factors,  man  and 
Nature,  generally  termed  labour  and  land.  With  an 
unlimited,  or  practically  unlimited,  supply  of  these 
two  factors,  how  is  it  that  wealth  is  and  has  been 
hitherto  so  comparatively  scarce  ?  "  But  is  the 
supply  of  "  man  "  unlimited  in  the  sense  of  man 
able,  willing,  and  properly  trained  to  work  ?  And 
is  the  supply  of  "  Nature  "  unlimited  in  the  sense 
of  land,  mines,  and  factories  fully  equipped  with  the 
right  machinery  and  served  and  supplied  by  adequate 
means  of  transport  ?  Surely  the  failure  in  production 
on  which  Mr  Kitson  so  rightly  lays  stress  is  due,  at 
least  partly,  to  lack  of  good  workers,  good  organisers, 
good  machinery,  and  good  transport  facilities. 
Workers  who  restrict  output,  employers  who  despise 
science  and  cling  to  antiquated  methods,  the  op- 
position of  both  classes  to  new  and  efficient  equip- 
ment, and  large  tracts,  even  of  our  own  land,  still 
without  reasonable  transport  facilities,  have  some- 
thing to  do  with  it.  And  lack  of  capital — this 
answer  to  the  question  Mr  Kitson  flouts  because, 
he  says,  "  since  capital  is  wealth,"  to  say  that 
"  wealth  is  scarce  because  capital  is  scarce  is  the 
same  as  saying  that  wealth  is  scarce  because  it  is 
scarce."  But  is  it  not  a  "fundamental  truth  of 
economic  science  "  that  capital  is  wealth  applied 
to  production  ?  Wealth  and  capital  are  by  no 
means  identical.  When  a  well-known  shipbuilding 
magnate  laid  waste  several  Surrey  farms  to  make 


WEALTH  AND   CAPITAL  295 

himself  a  deer-park,  the  ground  that  he  thus  abused 
was  still  wealth,  but  it  is  no  longer  capital  because 
it  has  ceased  to  produce  good  food  and  is  merely  a 
pleasant  lounging-place  for  his  lordship.  May  not 
the  failure  of  production  be  partly  due  to  the  fact 
that,  owing  to  the  extravagant  and  stupid  ^xpendi- 
ture  of  so  many  of  the  rich,  too  much  work  is  put 
into  providing  luxuries — of  which  the  above-men- 
tioned deer-park  is  an  example — and  too  little  into 
the  equipment  of  industry  with  the  plant  that  it 
needs  for  its  due  expansion  ? 

Mr  Kitson's  answer  is  much  easier.  According 
to  him,  instead  of  working  better,  organising  better, 
and  putting  more  of  our  output  into  plant  and 
equipment  and  less  into  self-indulgence  and  vulgarity 
all  that  we  have  to  do  to  work  the  necessary  reform 
is  to  provide  more  money  and  credit.  Since,  he 
says,  under  the  industrial  era — 

"  All  goods  were  made  primarily  for  exchange  or 
rather  for  sale  ...  it  followed,  therefore,  that  pro- 
duction could  only  continue  so  long  as  sales  could 
be  effected;  and  since  sales  were  limited  by  the 
amount  of  money  or  credit  offered,  it  followed  that 
production  was  necessarily  limited  by  the  quantity  of 
money  or  credit  available  for  commercial  purposes/' 

But  is  this  so  ?  If  goods  are  produced  more 
rapidly  than  money,  it  does  not  follow  that  they 
could  not  be  sold,  but  only  that  they  would  have 
been  sold  for  less  money.  The  producer  would  have 
made  a  smaller  profit,  but  on  the  other  hand  the 
cheapening  of  the  product  would  have  improved 
the  position  of  the  consumer,  the  cheapening  of 


296  MONEY    OR   GOODS? 

materials  would  have  benefited  the  manufacturer, 
and  it  is  just  possible  that  production,  instead  of 
being  limited,  might  have  been  stimulated  by 
cheapness  due  to  scarcity  of  currency  and  credit, 
or,  at  least,  might  have  gone  on  just  as  well  on  a 
lower  all-round  level  of  prices.  On  the  whole,  it 
is  perhaps  more  probable  that  a  steady  rise  in  prices 
caused  by  a  gradual  increase  in  the  volume  of  cur- 
rency and  credit  would  have  the  more  beneficial 
effect  in  stimulating  the  energies  of  producers.  But 
Mr  Kitson's  argument  that  the  volume  of  currency 
and  credit  imposes  an  absolute  limit  on  the  volume 
of  production  is  surely  much  too  clean-cut  an 
assumption.  This  absolute  limit  may  be  true,  if 
currency  cannot  be  increased,  with  regard  to  the 
aggregate  value  in  money  of  the  goods  produced. 
But  money  value  and  volume  are  two  quite  different 
things.  If  our  credit  system  had  not  been  developed 
as  it  has,  and  we  had  had  to  rely  on  actual  gold  and 
silver  for  carrying  on  all  production  and  trade,  it 
does  not  by  any  means  follow  that  trade  and  pro- 
duction might  not  have  been  on  something  like  their 
present  scale  in  the  matter  of  volume  and  turnover  ; 
but  the  money  value  would  have  been  much  smaller 
because  prices  would  have  been  all  round  at  a  much 
lower  level. 

This  contention  is  based  on  what  is  called  the 
"  Quantity  Theory  of  Money."  This  theory  Mr 
Kitson  wholeheartedly  believes,  so  that  this  is  not 
a  point  that  has  to  be  argued  with  him.  '  The 
value  of  money/'  he  says,  "  as  every  student  of 
economics  knows,  is  determined  by  the  quantity 


VALUE   OR    VOLUME?  297 

of  money  in  use  and  its  velocity  of  circulation." 
Quite  so.  If  you  increase  the  amount  of  money 
faster  than  that  of  goods,  more  money  has  to  be 
given  for  less  goods ;  the  value,  or  buying  power, 
of  money  is  depreciated  and  prices  go  up.  The 
present  war  has  given  an  excellent  example  of  this 
process  at  work.  All  the  warring  Governments 
have  printed  acres  of  paper  money,  and  have 
worked  the  credit  system  with  profligate  energy ; 
and  so  we  have  a  huge  increase  in  currency  and 
credit,  along  with  little  or  no  increase  (probably  a 
decrease)  in  consumable  goods,  and  prices  have  soared 
like  rockets  all  over  the  world.  In  neutral  countries 
the  rise  has  been  as  bad  as  anywhere,  because  the 
neutrals  have  been  choked  with  the  gold  that  the 
warring  Powers  exported,  putting  paper  in  its  place. 
So  we  see  that  the  volume  of  money,  on  the  theory 
so  emphatically  expounded  by  Mr  Kitson  and  en- 
dorsed by  common-sense — as  long  as  we  are  careful 
to  include  all  forms  of  money  that  are  taken  in  ex- 
change for  goods  in  the  definition — reflects  itself  at 
once  in  prices.  If  money  does  not  increase  in 
quantity  and  goods  do,  then  prices  go  down,  and 
after  the  necessary  adjustments  are  made  in  rates 
of  wages  and  salaries,  a  larger  trade  can  be  done 
with  the  same  amount  of  money  at  a  lower  level  of 
values.  The  volume  of  money  thus  limits  the 
aggregate  value  of  trade,  but  not  its  aggregate 
volume.  Periods  of  falling  prices  are  not  encourag- 
ing to  producers,  and  they  put  too  much  advantage 
into  the  hands  of  the  rentier— the  man  who  lives  on 
fixed  interest ;  on  the  other  hand,  they  are  generally 


298  MONEY   OR   GOODS? 

believed  to  be  in  favour  of  the  working  classes, 
since  reductions  in  wages  generally  lag  behind  the 
fall  in  prices,  which  means  increased  buying  power 
to  the  wage-earner. 

Mr  Kitson's  view  that  the  volume  of  trade  is 
limited  by  the  quantity  of  currency  and  credit  is 
thus  based  on  confusion  between  volume  and  value. 
Moreover,  it  follows  also  from  the  "  Quantity  Theory 
of  Money,"  which  he  holds,  that  if  he  applies  his 
remedy  and  multiplies  currency  and  credit  as  fast 
as  he  appears  to  want  to,  the  result  will  be  a  still 
further  depreciation  in  the  buying  power  of  money, 
and  a  further  rise  in  prices  and  an  increase  in  all  the 
bitterness,  discontent,  suspicion,  and  strikes  that 
the  rise  in  prices  has  already  caused 'during  the  war. 
Is  this  a  prospect  to  pray  for  ?  Surely  if  we  want 
to  enjoy  "  boundless  wealth  and  prosperity "  the 
way  to  do  so  is  to  turn  out  goods — things  to  eat  and 
wear  and  enjoy — and  not  to  multiply  money,  thereby 
merely  depreciating  its  value,  on  Mr  Kitson's  own 
admission.  He  thinks  that  "  nothing  but  an 
abundant  supply  of  currency  in  the  shape  of  legal 
tender  notes  and  bank  credit,  could  have  enabled 
us  to  undertake  successfully  such  unprecedented 
burdens  "  as  we  have  borne  during  the  war.  But 
it  may  equally  well  be  argued  that  we  have  borne 
these  burdens  because  we  worked  harder  than  ever 
before  to  turn  out  the  needed  stuff,  organised  better, 
used  our  machinery  to  its  full  power,  and  spent  less 
of  our  product  on  luxuries ;  and  that  the  abundant 
currency,  by  forcing  up  prices,  immensely  increased 
the  cost  of  the  war  and  produced  industrial  friction 


THE   GOLD   STANDARD  299 

which  several  times  brought  us  unpleasantly  close 
to  disaster. 

Mr  Kitson,  however,  uses  the  "Quantity Theory 
of  Money" — the  doctrine  that  the  value  or  buying 
power  of  money  varies  according  to  its  quantity  in 
relation  to  that  of  the  goods  that  it  buys — chiefly 
as  a  stick  wherewith  to  beat  the  Gold  Standard. 
He  shows,  very  easily  and  truly,  that  it  is  absurd  to 
suppose  that  the  value  of  the  monetary  gold  standard 
is  invariable.  Thereby  he  is  only  beating  a  dead 
horse,  for  no  such  argument  is  nowadays  put  forward. 
The  variability  of  the  gold  standard  of  value  is  ac- 
knowledged, whenever  a  fluctuation  in  the  general 
level  of  commodity  prices  is  recorded.  But  gold  is 
the  basis  of  our  credit  system,  and  of  those  of  all  the 
economically  civilised  countries  of  the  world,  not 
because  its  value  is  believed  to  be  invariable,  but 
because  it  is  the  commodity  which  is  universally 
accepted,  in  such  countries  and  in  normal  times,  in 
payment  of  debts.  This  quality  of  acceptability  it 
has  got  largely  by  custom  and  convention.  Mr 
Kitson  speaks  of  the  "  selection  of  gold  by  the 
world's  bankers  as  the  basis  for  money  and  credit/' 
But  it  was  selected  as  currency  by  common  custom 
long  before  bankers  were  heard  of.  And  it  was 
selected  because  of  its  permanence,  ductility  and 
other  qualities,  especially  its  beauty  as  ornament, 
which  made  man,  eager  to  adorn  himself,  his  women- 
kind,  and  the  temples  of  his  gods,  always  ready  to 
accept  it  in  payment,  knowing  also  that,  because  of 
this  acceptability,  he  would  always  be  able  to  ex- 
change it  into  any  goods  that  he  wanted. 


300  MONEY    OR  GOODS? 

Any  other  commodity  that  earned  this  quality 
of  universal  acceptability  could  do  the  work  of  gold 
just  as  well.  But  until  one  has  been  found,  gold, 
as  long  as  it  keeps  that  quality,  holds  the  field. 
And  bankers  use  it  as  the  basis  for  money  and 
credit,  not  because,  as  Mr  Kitson  says,  they  selected 
it  owing  to  its  scarcity,  but  because  this  quality  of 
universal  acceptability  made  it  the  thing  in  which 
all  debts,  both  at  home  and  abroad,  could  be  paid. 
"  Given,"  says  Mr  Kitson,  "  a  self-contained  trading 
community  with  a  certain  quantity  of  legal  tender, 
just  sufficient  for  its  commercial  needs,  and  it  makes 
no  difference  either  to  the  value  or  efficiency  of  the 
money  or  to  the  trade  affected  whether  it  be  made 
of  metal  or  paper."  Quite  so,  but  trading  com- 
munities are  not  self-contained.  Their  currency  has 
to  be  convertible  into  something  acceptable  abroad, 
and  that  something  is,  at  present,  gold.  It  is  possible 
that  the  world  may  some  day  evolve  an  international 
paper  currency  that  will  be  everywhere  acceptable. 
But  such  an  ideal  requires  a  growth  of  honesty  and 
mutual  confidence  among  the  nations  that  puts  it 
a  long  way  off.  And  how  is  its  volume  to  be 
regulated  ? 

This  question  is  all-important,  whether  the  cur- 
rency be  national  or  international.  Mr  Kitson 
speaks  of  a  currency  "just  sufficient "  for  the  com- 
munity's commercial  needs.  Who  is  to  decide  when 
the  currency  is  just  sufficient  ?  The  Government  ? 
A  sweet  world  we  should  live  in,  if  among  other 
party  questions,  Parliament  had  to  consider  multi- 
plying or  contracting  the  currency  every  year  or 


WHO    WILL    DECIDE?  301 

every  month,  with  all  the  interests  that  would  be 
affected  by  the  consequent  rise  or  fall  in  prices, 
lobbying,  speech-making,  and  pulling  strings  to 
work  the  oracle  to  suit  their  pockets.  And,  accord- 
ing to  Mr  Kitson's  view,  that  the  volume  of  trade 
is  limited  by  the  supply  of  currency,  this  volume 
would  then  depend  on  the  whims  of  the  House  of 
Commons,  half  the  members  of  which  would 
probably  be  innocent  of  a  glimmering  of  under- 
standing of  the  enormously  important  question 
that  they  were  deciding.  The  gold  standard,  which 
makes  the  course  of  prices  depend,  more  or  less, 
on  the  chances  of  digging  up  a  capricious  metal 
from  the  bowels  of  the  earth,  has  its  obvious  draw- 
backs ;  but  it  is  a  clean  and  sensible  business 
compared  with  making  them  depend  on  the  caprices 
of  Parliament,  complicated  by  the  political  cor- 
ruption that  would  be  only  too  likely  to  follow  the 
putting  of  such  a  question  into  the  hands  of  our 
elected  and  hereditary  representatives  and  rulers. 

Such,  however,  seems  to  be  the  Promised  Land 
to  which  Mr  Kitson  wants  to  lead  us.  Thus  he 
propounds  his  remedy.  "  The  remedy  is  surely 
obvious.  Divorce  our  legal  tender  from  its  alliance 
with  gold  entirely,  so  that  the  supply  of  money  and 
credit  for  our  home  trade  is  no  longer  dependent 
upon  our  foreign  trade  rivals.  Base  our  currency 
upon  the  national  credit  .  .  .  treat  gold  as  a  com- 
modity only,  for  the  settlement  of  foreign  trade 
balances." 

This  passage  in  his  article  in  the  September 
Supplement  tells  us  what  to  do.  Keep  gold,  out  of 


302  MONEY   OR  GOODS? 

deference  for  foreign  prejudice,  for  the  settlement 
of  foreign  trade  balances,  but  make  as  much  paper 
money  as  you  like  for  home  use.  As  our  legal 
tender  money  is  to  be  "  divorced  entirely  from  its 
alliance  with  gold  "  it  clearly  cannot  be  convertible 
into  gold.  So  that  apparently  we  shall  have  a 
paper  pound  and  a  gold  pound  (the  latter  for  foreign 
use)  with  no  connection  between  them.  This  stage 
of  economic  barbarism  has  been  left  behind  now  even 
by  some  of  the  South  American  republics.  The 
paper  pound,  based  on  the  national  credit,  can  be 
multiplied  as  fast  as  our  legislators  think  fit.  If 
they  do  not  multiply  it  fast  enough,  Mr  Kitson  will 
tell  them  that  they  are  strangling  trade,  because 
the  volume  of  production  is  limited  by  the  amount 
of  money  available.  At  the  same  time  bank  credits 
will  be  multiplied  indefinitely  because,  as  was  shown 
in  the  November  Supplement,  Mr  Kitson  supports  a 
view  that  the  average  business  man  holds  (according 
to  him)  that  he  ought  to  have  a  legal  right  to  as 
much  credit  as  he  wants.  With  the  Government 
printing  paper  to  please  its  supporters,  with  the 
banks  obliged  by  law  to  give  credit  to  every  one  who 
asks  for  it,  and  with  prices  soaring  on  every  addition 
to  currency  and  credit,  what  a  country  this  will  be 
to  live  in,  and  what  a  life  will  be  led  by  those  who 
have  to  compile  and  work  out  the  index  numbers 
of  the  prices  of  commodities  !  Some  of  us,  perhaps, 
will  prefer  the  jog-trot  conservatism  of  Lord  Cun- 
liffe's  Currency  Committee,  who  in  their  recently 
issued  report  *  (which  every  one  ought  to  read) 

*  Cd.  9182.    2d. 


A   HUMDRUM   CONCLUSION          303 

recommend  that  gold  should  not  be  used  for  circula- 
tion at  present,  but  that  endeavours  should  be  made 
towards  the  cautious  reduction  of  our  swollen  paper 
currency,  and  that  its  convertibility  into  gold  should 
be  maintained. 


/ 


INDEX 


Addis,  Sir  Charles,  on  banking, 

163,  168 
Aerated  Bread  Co.,  and  bonus 

issues,  157 
Allies,  loans  to,  244 
America,  effect  of  war  on,  25 
War  finance  of,  125,  126 

Bank  Act :  its  purpose,  84 
Its  suggested  repeal,  84,  273 
Its  working,  235  seq. 
Bank  Amalgamations,  progress 

pf,  77  seq.,  163 

Bechhofer,  Mr,  on  Guild  Social- 
ism, 209 
Bills  of  Exchange,  as  basis  of 

issue,  273 
Bonar   Law,  Mr,  on  after-war 

position,  246,  247 
On  capital  levy,  68,  70,  71, 

73 
On  sale  of  securities,  257 

British  Trade  Corporation,  for- 
mation of,  76 

Brunner,    Mond,    and    bonus 
shares,  150 

Budget,  in  1918,  129  seq. 

Canadian   Pacific,   and   bonus 

issues,  158 

Capital,  foreign,  180  seq. 
Levy  on,  n,  63  seq.t  217  seq., 

259 

Meaning  of,  2 
Supply  of,  9  seq->  l83 
War's  destruction  of,  3 


Capital  Issues,  Committee  on, 

279,  287,  292 

Licence  required  for,  278  seq. 
Need  to  restrict,  283 
Stock   Exchange   and,    281, 

282 
Cole,  Mr,  on  Guild  Socialism, 

202  seq. 
Cunliffe  Committee,  report  of 

227  seq.t  266  seq.,  302 
Currency  :  inflation  of,  22,  108, 

227,  232,  254,  297 
International,  134  seq.,  300 
Metals  as,  137,  299 
Origin  of,  135 
Quantity  theory  of ,  138,  139, 

296 
Report  on,  227  seq. 

Daily  News,  on  capital  levy, 
65 

Expenditure,  Committee  on, 
in 

France,  after-war  position  of, 
28 

Free  Trade  and  British  supre- 
macy 20 

Germany,  after- war  position  of, 

29,  124,  186 
Our  claims  against,  249 
War  finance  of,  50,  119  seq. 


306 


INDEX 


Gold  standard :  affected  by  war, 

141  seq. 
Faults  of,  137 
Reasons  for,  299,  300 
Goodenough,  Mr,  on  note  issue, 
265 

Hoare,  Mr  Alfred,  on  taxation, 

212  seq.,  224 
Holden,  Sir  Edward,  and  the 

Bank  Act,  84  seq.,  266  seq. 

Inflation,  working  of.  22,  108, 

254.  29? 
Interest,  rate  of,  7 

Kitson,     Mr,      on     currency, 
293  seq. 

Labour,  example  set  by,  38 
Lawrence,     Mr     Pethick,    on 

capital  levy,  219,  220,  259 
Lees,    Mr    Edward,    on     debt 

redemption,  226 
Lloyds,  elasticity  of,  17 
London,  prestige  of,  15  seq, 

Macaulay,  Lord,  on  bad  money, 
261,  262 


New  Statesman,  on  capital 
levy,  69,  74 

Owen,  Senator,  on  American 
system,  271 

"Quantity  Theory,"  of  cur- 
rency, 138,  139,  296  seq. 

Reserves,  capitalising,  149  seq. 
Round      Table,      on      capital 
levy,  65 

Socialism,   and   bank  amalga- 
mations, 82,  164 
In  light  of  war,  201 
Guild,  198  seq. 

Stilwell,  Mr,  on  paying  for 
war,  222,  259 

Taxation,  as  war  weapon,  42, 

53,  61,  252 

Increase    of,   in    war,    109, 
127  seq. 

"  War  Emergency  Workers," 
on  capital  levy,  68,  72 

Webb,  Mr,  on  State  banking, 
165  seq. 


PRINTED  BY  WILLIAM  CLOWES  AND  SONS,   LIMITED, 
LONDON  AND  BECCLES,    ENGLAND. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


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DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
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£3 

FEB  24  1941  M 

SiP  09/990 

] 

1  1  11 

f 
rjfti 

r—  15 

*ij 

LD  21-100,«-7,'39(402s) 

